At the close of trade on Friday 13th February 2015, the Australian sharemarket (All Ords – ASX:XAO) recorded a new seven year high to close at 5,850 points – a level not seen since May 2008. While this outcome was on the back of the RBA’s cautious outlook and their reduction in official interest rates earlier in the week, investors have again embraced market risk in their quest for a higher income yield than the interest rates currently on offer via cash and term deposits.

Investing in Shares

While the sharemarket gives investors the opportunity to buy and sell equity in publicly listed companies, a quality share investment can and should focus on both capital growth and income over time. Historically, shares have outperformed all other asset classes (cash, fixed interest and property) over the medium to long term. So what is a share?

When you purchase a share, you’re effectively purchasing part-ownership in a company which is listed on a stock exchange (either in Australia or one of the many exchanges around the world). This part-ownership entitles you to a share in the company’s future profits which you receive in the form of share dividends. You also have the opportunity to benefit from the potential growth in share price as the company grows, which means your initial investment is growing as well.

Generally, a company will list on the stock exchange to raise money for planned activities, such as further expansion of their markets, an upgrade in technology or even the purchase of another company which complements their core business.

What types of shares are available?

You can purchase shares in a range of Australian and international companies, across many industries, from manufacturing and heavy industry to retail and exporting. In addition, you also have access to a range of property investments listed on the stock exchange, including office buildings, shopping centres, car parks and tourist resorts.

How do you invest in shares?

There are two main ways in which you can invest in shares:

1 Directly. You choose to buy and sell shares directly yourself – you have total control over your money and what you buy and sell. However, this means that you will need to research and manage those shares yourself (unless this is done for you by your financial adviser).

2 Managed Investment. Your other option is to invest in a managed portfolio, where an investment manager will research the shares and then buy and sell on your behalf (as well as for the other investors in that fund).

There are a number of key benefits of share investing, including:

1. The ability to diversify risk

Share market investments involve an element of risk so diversifying your share portfolio is important. This means ‘not putting all your eggs in the one basket.’ In other words, spreading your investment risk across a variety of asset classes (eg retail, manufacturing and industrial companies), as well as a range of fund managers (eg Perpetual, Ausbil).

Investment performance is cyclical and although there will always be peaks and troughs, a diversified investment portfolio allows you to balance out short-term troughs with cyclical peaks in performance ultimately smoothing your investment performance over time.

By investing in managed funds, it’s easy to achieve a diversified investment portfolio with a relatively small amount of money. Another way to spread your risk is to invest across a range of asset classes (eg property or cash).

2. Shares out-perform over the long term

Shares are a long-term investment (five to seven years) and this helps smooth out the short-term risk and fluctuations in investment performance.

3. Income stream and capital growth

Over time, as the share price increases, so does the value of your initial investment. This is called capital growth and is important in helping your investment increase in value over time. In addition, regular income payments or the dividends paid by listed companies from profits, gives you an ongoing income stream.
Most importantly, as a company’s share price is increasing, so are the dividends, because the dividends payable are generally calculated as a percentage of the value of the company.

If you are interested in the Sharemarket or would like to know more, please contact Adviser fp (CLICK HERE) and one of our Certified Financial Planners will be able to assist you.