Ever contemplated investing in shares but don’t know where to start?

Money and Life
(Financial Planning Association of Australia)

 

Before you do, it’s important to understand what shares are, how they work and why the bulk of adult Australians who own shares – directly or through managed funds/super – see it as a primary strategy for generating long-term wealth.

Shares are units of ownership in any company that’s listed on the Australian Securities Exchange (ASX) or any other stock market globally that people can choose to buy or sell, also referred to as trading. When you buy even a small number of shares, you effectively own a small part of the company.

This means you are entitled to a share of their profits called dividends, and while many listed companies pay dividends twice annually, others may pay more or less frequently.

People typically aim to sell shares for a profit by buying them for a lower price, and selling them at a higher price, at some time into the future. This is based on the underlying expectation that good stocks will be more valuable into the future than they are today. 

How do shares work?

 For every prospective buyer of shares there must be a corresponding seller. A trade occurs when both buyer and seller reach a mutually agreeable price on which the transaction can be completed, and it’s the job of the share market to ensure that buyers and sellers find each other.

Shares in any stock can be traded continuously during the hours a share market is open.

How to trade shares?

Most shares are traded electronically on a share trading platform, with buy and sell orders being placed via computers, and matched online by exchange-operated software. While some people prefer to trade shares themselves (online) via a trading platform, others prefer to engage a full-service broker to handle it for them.

Why are shares a great wealth-generating strategy?

The price of shares can go up or down based on any number of factors that impact investor sentiment, including company announcements, interest rates, and the political or macro-economic climate.

Despite the degree to which the share price rises and falls over the short-term in response to investor sentiment (aka volatility), share markets have historically outperformed other asset classes (like property, cash and fixed income) over the medium to long-term.

This is why shares are generally regarded as good long-term investments.

What are the most common investment strategies? 

The three most common strategies for share market investing include:

1. High dividend

This is where people are attracted to stocks paying a sizable portion of profits as a