The Basics of Investing in Shares
While some people may be reluctant to let a financial advisor make share investments – as they want to do their own research on the companies – others don’t want to do the research and are happy to leave the work to an expert. In this blog post, we’ll explain how investing in shares works, and discuss our approach to share investment.
How does investing in shares work?
When you buy a share, you buy a small piece of a company and a ‘share’ of any profits that the company makes. Shares are a good long-term investment as they can rise and fall in value in the short term but tend to increase at a rate higher than inflation in the long term – and can be bought either directly or through a fund like KiwiSaver.
Returns from shares come in the form of capital gains, where a share is sold for more than you paid for it, or in dividends, where the company pays out a share of the profits they’ve earned to shareholders. Dividends can be received in cash, or can be reinvested into the company in order to buy more shares.
What is the role of shares as part of an investment portfolio?
With a few exceptions, it’s generally not a good idea to invest entirely in shares or entirely in bonds within an investment portfolio, so you’ll normally find a mix of shares and bonds within any portfolio.
While bonds are a fixed-term investment with an accurate expected rate of return, bonds are an ongoing investment without an end date and with the potential to earn a higher return. For the most part, someone will depend more on bonds within their investment portfolio later in life, whereas someone in the early stages of their investment career can put a greater focus on shares, as they aren’t going to imminently retire.
What is Collaborative Consulting’s approach to shares?
When deciding which investments to make for your portfolio investment, the four main factors we use to assess shares are: market, company size, relative price, and profitability.
Market – the overall state of the market – as well as the client’s needs – will help to determine the degree to which we invest in shares vs. bonds as part of a portfolio.
Company size – while large companies are the safer option for investment, smaller companies can often bring premium returns and have the potential to become high-value investments.
Relative price – we aim to distinguish ‘growth companies’ from ‘value companies’: the former have strong earnings growth potential, while the latter are undervalued by the market.
Profitability – companies can fairly easily be classified as high-profit companies or low-profit companies, so it’s easy to put together an estimate of how much profit a potential investment will be making.
If you’re looking for a financial advisor that will take the time to fully understand your needs before starting an investment profile that balances shares and bonds in a way that aims to increase and maximise your net wealth, then Collaborative Consulting are the experts for you. With the aim to bring all our clients financial certainty while allowing them to prosper in the financial future, we are the best choice for anyone that wants help achieving their lifetime financial goals.