Three minute guide to shares: Getting started
Readers talk back
I wonder, if we had dinner together and talked about investment, whether shares would be front of mind for you.
Highly educated women have shown in many studies to demonstrate greater risk tolerance and oftentimes more successful outcomes than their male peers when investing in shares, so it puzzles me why we don't do more of it.
For those of you with some knowledge but who are just starting out with shares, here are a few of the must-knows. (And for those of you with more knowledge, watch this space. We'll soon be providing more advanced information too).
- First up, the definition:
Shares: one of the equal parts into which a company's capital is divided, entitling the holder to a proportion of the profits.
Shareholder: an owner of shares in a company.
Thank you, Oxford Dictionary.
- Trader or investor?
Investors are typically seeking to buy shares for medium to long-term financial gains; seeking either growing dividends (yield) to keep pace with inflation, or a rising share price to increase the value of their capital.
Traders on the other hand, are typically looking for shorter-term gains, seeking to profit from buying and selling the shares of mispriced companies.
Day traders carry the name because they tend to buy and then sell shares across the day, often based on the smallest of price differences, aiming to end the day with a profit. They don't usually care what actual business the company is in, rather they're hunting down shares with a price they think will move up in the short term, in order to sell and take profit.
Day trading is a mug's game for the amateur, since share pricing is heavily dependent on current and relevant company information; and by the time the woman in the street gets the information, the institutional players will have stripped out the best of the opportunities. It's like arriving at the Myer Sale at 3pm on Boxing Day when the picks of the day have long gone.
As an amateur in your home office, the information you receive from the web comes with a twenty-minute delay, it's an ASX rule. So just as you wouldn't cross the road based on information your eyes received twenty minutes ago, I wouldn't suggest trading shares on the same basis.
If you're dead set on day trading, make sure you have high quality, real time information to work with and cap your risk by allocating a tranche of money you can afford to lose. Otherwise, investing is quite different in nature and statistically, has been shown to offers greater gains over the medium to long term than trading, just ask Warren Buffett next time you see him.
- Income or Capital Gains? - High yield vs high growth
Listed Companies exist to make money for their shareholders and they facilitate this either by paying out their profits to shareholders as dividends, or by re-investing profits into the company to try and make greater profits in the following years.
a. High yield
High yield, or high dividend shares are those that generally have high payout ratios, meaning they pay out a high proportion of their profits, or 'earnings,' some might pay up to 100%. Telstra or Transurban are current examples of these. High yielders don't generally have big price growth – if they make $100 a year and hand it all out to their shareholders, their share price generally remains relatively stable.
Or so the theory goes in standard market conditions.
The thing is, we are currently not currently experiencing standard market conditions while the long-term effects of the GFC remain. Lately, in an attempt to offset risk around the flux in the European economies, stable companies with stable earnings have been in high demand by investors and their share prices have rallied in correlation. Investors who rode the wave gained a double whammy gaining both income and price growth. Telstra's price behaviour has been a great example of this, but don't expect double happiness or uncharacteristic price rises all the time, we all know past performance is no guide to the future!
b. Low yield
Low dividend yield or high growth companies, on the other hand, generally pay out much less of their earnings, reinvesting them instead them back into the company to fund future growth. BHP is an example of this.
Companies that re-invest most of their profits for future growth could be expected to have rising share prices, and therefore capital gains, because they are expanding and investing in new products and ventures.
Or so the theory goes, again.
If, however, companies re-invest in new projects in which they may not be so expert they can end up losing money, which will reflect in the share price. Some recent examples include BHP investing in shale gas through their Petrohawk purchase; RIO expanding into aluminium through their Alcan purchase; Newcrest Mining buying Lihir Gold, I could go on, but you get the point. These are examples of companies whose share prices have been hit hard lately because they didn't stick to their knitting.
- Get advice or DIY?
One theory that does hold true however is that unless you're an expert, it's best to get professional advice on which shares to buy. Professional stockbrokers have access to live, real time information, can make a call on whether your pet company's expansion is more likely to create a fabulous or disastrous outcome for your dollars, and can get you out fast if the storm clouds are gathering. Equally, professionals can give you swift access to a great opportunity and can construct a portfolio across a range of shares to diversify your risk.
Alternatively, you could trade directly with an online broker or through the trading portal of one of the large financial institutions; it's probably cheaper than going through a personal relationship but doesn't come with the same advice or monitoring, and cheaper is not always better. You could end up losing more money than you save on fees by missing important information about the companies in which you have invested and that would rather defeat the purpose wouldn't it?
Are you starting out in share market investing? Why not tell us about your experience?
I don't manage money for anyone except my family, nor do I give financial advice, and my opinions are my own unless stated otherwise. My writing should not be construed as general or personal advice. You should consider obtaining independent advice before making any financial decisions.