If you are thinking about adding some shares to your savings portfolios, check out these beginning concepts, which are hopefully jargon free.
Let’s start with understanding where shares fit into the investment landscape. There are really only four ‘proper’ investments – fixed income, commodities, property and businesses.
Fixed Income – think cash, term deposits and bonds.
Commodities – include things like gold, timber, silver and so on.
Property – covers all the various sectors including residential and commercial.
Businesses – this include the full spectrum of companies, from a local book shop to a Pizza Hut franchise. It also includes companies that are listed on the stock market, which are widely referred to as ‘shares’.
In addition, the terms ‘stocks’, ‘shares’ and ‘equities’ are inter-changeable, they all describe listed companies.
When you buy a share, you are buying a portion of ownership of a business, nothing more or less.
You may wonder, why not just keep the money in the bank? The answer is inflation. Even with inflation at just 3% your cash will lose 15% of its spending power in just five years. To protect your investments against inflation, look towards real assets, like shares and property, which can increase their income stream in line with inflation.
Although, it should be noted that shares have a downside too, literally. Share prices can be very unpredictable. This volatility can put a lot of people off shares. There are ways of reducing this volatility, including holding a diversified portfolio of shares.
Many debate over which is the best investment, property or shares. This question misses the point. Both are good investments and it is better to own both in a diversified portfolio than choose one over the other.
For those who are new to shares, there are two reasons why it can be important to start slowly. Firstly, investing all of the capital you have earmarked for shares on one day means you run the risk of investing just before a market fall. It is safer to spread your buying out over a period of time, even a couple of years.
Secondly, investing gradually lets you get familiar with owning shares without having too much money invested from day one. They do take some getting used to. Owning shares is not like owning a property. The price of your property isn’t in the newspaper every night, or worse doesn’t flicker on the internet during the day.
Furthermore, it is important to understand your share investments. It is advisable that you find out more about the NZ Shareholders Association. The Shareholders Association is most well known for its work on corporate governance and speaking out in support of small shareholders interests. They provide valuable education and a discussion groups for people new to investing in shares.