Investing In Shares

Investing in shares can be a rewarding and profitable experience. It can allow your savings to grow at a faster rate than other investments or bank accounts can offer, and share trading has other inherent benefits for those who invest in shares.

Of course, like anything in life, share trading also has associated risks. These risks are amplified when you choose to invest for a shorter time frame, but for those interested in long-term investing, the share market has historically produced better returns than any other investment.

Succeeding in the share market takes more than past performance, though, and that's why we're here - to help inform you on the process of share trading. This includes how to buy and sell shares, and even the best shares to buy. For now, we're going to have a look at the reasons people choose to invest in shares, and some of the unique benefits of the Australian share market. We'll also look at the risks, and hopefully bring you to some conclusions that will help you become a winning investor.

Share Trading Advantages

In recent years, share trading has become an increasingly viable investment alternative for many Australians. With rising real estate prices, discount stock brokers and a greater availability of knowledge, all the conditions have aligned in favour of share trading.

You can start share trading for as little as a few thousand dollars, and even short-term trading is no longer the extremely risky, full-time stock trader profession it has been in the past. In fact, according to the ASX, over 40% of Australians directly or indirectly participate in the share market.

The Australian stock exchange has grown to be one of the largest in the world, and that means we have easy access to an extremely liquid and transparent market that is well-geared on a global scale. Even in recent financial downturns, making money on the stock market is a much easier prospect than it has been in the past.

Apart from all these things and more, there are some very specific conditions that set investing in shares apart from the rest. This includes:

Diversity

Shares offer a unique and beneficial advantage in the form of diversity. The reason investors always stress the importance of a diverse portfolio is it increases your chance for profit while simultaneously reducing the potential for loss.

Diversity in shares can be achieved in many ways. For a minimal outlay (relative to other investments) you can invest in several companies across several sectors. For example, you could easily invest in a mining company, a financial company and a healthcare company to create a diverse portfolio with broad access to the stock market. If one sector experiences a crash, your other sectors will help guard against added risk. If one sector experiences a boom, you will also hopefully be reaping the rewards.

Often gains and falls happen market-wide, so diversity is not a guaranteed way to avert risk, but it will help. In many cases, financial advisors will suggest introducing commodities as percentage of your portfolio. Gold is one popular commodity well known for its ability to preserve value and bring stability to a portfolio by guarding against currency fluctuations and stock market volatility.

Of course, creating a diverse portfolio in this way requires substantially more capital. However, for those looking to invest with smaller amounts, there are other options to create diversity. The ASX has trading tools such as ETFs (Exchange Traded Funds) and managed funds that allow you to gain access to a broad number of investments with the one simplified investment.

Usually, a fund is made up of investments in several areas, and in some cases, funds track an underlying asset. For example, you will find a fund designed to track the entire performance of the ASX 200, so you can easily gain access to the 200 biggest companies on the Australian share market and stake your investment on the performance of all these companies. It's easy to see how diversity of this type can be beneficial to many investors.

In recent times, online stock brokers have offered a investment tool for new investors called a 'share pack'. This is a pre-packaged bundle of shares, usually picked by financial advisors, to suit a safe and broad investment structure for investors with smaller amounts of capital, or those who want the benefit of professional financial advice without the added price tag. In many cases, share packs will include some of Australia's biggest companies, which often have diversified operations themselves further increasing diversity.

No matter your budget, there are options to create diversity, so do not discount this important advantage of share trading.

Liquidity

As mentioned, the size and scope of the Australian stock market is quite large on a global scale, and that means we have access to liquidity in our market. While it can depend on the size of the company you choose to invest in, a lot of the time you can count on the ability to buy and sell shares almost instantaneously. This is important to guard against short-term price fluctuations that can affect the dollar value of your investment. The bigger the company, the more liquidity you will have when it comes to your share trading ability.

Dividends And Further Benefits

Another advantage of share trading is the fact that many shares pay dividends, especially when the company is earning profits. Dividends are a dollar payment made into a nominated account paid out to shareholders according to the amount of shares they own.

The amount of dividends you are paid can change depending on the company, time of year and performance of the business and the overall market itself. A company does not have to pay its shareholders dividends, and it may instead choose to reinvest the money or withhold it for other reasons.

However, in many cases, a company will pay out dividends in times of profit, and often these payments come with an added tax benefit in the form of franking credits. Because the company has most likely already paid tax on its earnings, it delivers further savings to investors in the form of franking credits.

Sometimes companies offer shareholders reinvestment schemes that allow you to use dividends to increase your share portfolio. Other benefits include the ability to buy shares at a price lower than current market value, and even discounts or benefits related to the company's business operations, such as consumer discounts, ticket offers or free merchandise.

The Online Share Trading Evolution

We mentioned in the introduction the advent of discount brokers and the greater availability of information. We think this is one of the most important developments in recent times on the share market, and it all centres around the speed, growth and accessibility of the internet.

It wasn't that long ago that share trading was only accessible as a worthwhile investment to those with a lot of money and access to a top-dollar financial advisor or full service broker. These professionals still play an important role in the industry, and many people will still rightfully choose to use such services. After all, paying more in brokerage is worth it if it guarantees you a better return.

However, it doesn't matter if you are using a full service broker or braving the markets on your own research and decisions, the use of the internet cannot be discounted. Now, we can easily access stock market reports, business reports, relevant news, stock tips and other trading advice through websites forums and online organisations.

It allows us to make better informed decisions and access continually evolving trading strategies, and as you will soon realise, information on the stock market is king. It's the difference between profit and loss.

For those with less money, or those willing to structure their investment around more flexible personal goals, discount brokers make it easier to achieve profits than ever. The word discount broker is a bit deceiving, and in reality, online brokers deliver a huge amount of data to customers through online trading platforms, and the only difference is they leave the final decisions (and consequences) up to you.

Even short term trading, also called day trading or active trading, is feasible for many people on a part-time basis with the use of pre-determined orders, mobile SMS updates and general internet access. Throw in the low brokerage costs, and you can see why online trading platforms and online stock brokers are growing in popularity.

With share trading becoming so easy, it's also important to remember the risks and make wise decisions with your investment capital to avoid potentially devastating losses and maximise your potential of earning a profit.

Share Trading Risks

Making money on shares requires the company and often the overall market to do well. If these two factors do not coincide, share prices can go down and reduce the value of your investment. In a worst-case scenario, the company you own shares in my go bankrupt and you may receive little to no money for your shares. This is why diversity is important.

Ultimately, it is supply and demand that drives business operations, and over the long term, it is the big established companies that produce the most stable result. These shares are often called blue chip and are favoured by many investors for their safety and reliability. Buying shares in smaller or developing companies, or even companies more exposed to risk, can increase your potential for profit and also for loss.

In some cases, timing can be important when assessing the risks of own shares. If you are planning to buy and hold shares for 10 years, the day-to-day price movements are not really important to you. Unless the business is facing failure, you really should be weathering any storms until much closer to the time you are planning to liquidate your investment.

If you have held shares already for a planned amount of time, or are employing a short to mid-term trading strategy, share price spikes and short-term volatility increase your risk substantially. A big price shift could affect your profits or losses by 10% or more even on a daily basis.

Even though share prices often move much more smoothly with a degree of predictability, the potential for risk is always there. If you are liquidating a long-term investment, you may want to consider some hedging tools to protect the short term value of your investment, maximise gains and minimise losses.

Smart Investment Choices

Now that you know more about the risks and rewards that share trading can deliver, you are in a better choice to make informed and intelligent investment decisions. There are many good reasons to enter the share market, and a vast majority of people have made a lot of money in shares over the long term.

However, recent times have proven that market crashes are always a potential and you must have a strong trading strategy and solid investment goals that minimise risk while maximising profit. Discipline is a key factor in share trading.

Now that you have a general understanding, it's worthwhile taking a look at how to buy shares and sell shares. We hope this information has proven useful in your quest to meet your personal financial and investment goals.