At some point in your life, whether it's at a dinner party or a family barbeque, you’ve been told that investing in shares is a great way to turn your money into more money. And when you hear that advice, often the first question people ask is - do I have enough money? When the real question they should be asking is - do I have enough time. While the stock market can be a great place to invest your hard-earned money, it does require taking the time to understand how it works and monitoring the progress of the companies and industries you have or plan to invest in. If you’re considering developing a share portfolio, here are some things to consider before asking yourself how much money you're willing to invest.
The benefits of investing in the share market
The stock market is just one of the ways people like to generate a return. Peer-to-peer lending, REITs, cryptocurrencies, venture capital - there are many different ways you can invest your money. So it begs the question - why the share market? Here are three benefits to investing in the share market.
1. Low cost to invest: One of the most significant advantages to investing in stocks is how cheap it is to buy and sell shares. If you’re managing your own portfolio of stocks, the only fee you’d pay to invest your money is a brokerage fee per transaction. For example, ANZ Share Investing charges $19.95 per transaction when you invest using their platform. This is a lot cheaper than if you were to pay thousands on stamp duty for an investment property.
2. Easy to buy and sell: Liquidity is a financial term used to describe how quickly you can turn an asset into cash. When it comes to stocks, they have a relatively high liquidity. Because of the large volume of transactions that happen every day, often you can exchange shares for cash incredibly quickly. That means if you're in an emergency and you need money fast, you can convert your shares into cash quicker than if you were to sell your stake in a start-up which could take months.
3. Dividend Income: Occasionally, when a company turns a profit, they distribute their net profits as a once-off (or regular) payment to their shareholders. This is called a dividend. This dividend can be a form of passive income for investors heavily invested in a range of stocks that pay regular dividends.
Are you the best person to manage your portfolio?
If you’re just starting to invest in shares, you need to know what your goals are. Understanding how long you plan to invest for, how much you expect to get back and how much you are willing to invest to ensure you reach your goals will help set your expectations and give you an understanding of the kind of risk profile you will need to take on to achieve your financial objectives.
Now that you’ve set your direction, you need to take a step back and realise what’s on the table - your hard-earned cash. It’s important to remember that before you ask yourself the next question. Once you’ve established the goal you are working towards, you need to ask yourself honestly - do I have the time to give this the careful attention it deserves?
Taking the time to understand the investment mechanics, keep on top of market conditions and company news takes time, patience and dedication. So the answer could very well be no - and that’s okay! There are plenty of incredible financial professionals who can ensure you reach your investment goals without you having to lift a finger. Taking the time to make sure you soberly align your investment goals with your own capabilities, time and lifestyle limitations may save you from heartache down the track.
The more you know, the better
So you’ve decided to put the time and effort required to be a diligent investor? Here’s where the fun begins! When it comes to investing, the more you know - the better. Information is king when it comes to investing in stocks and there are three main areas you should be aware of when you’ve got your money on the table.
Understanding investment mechanics
It’s often said that business is another language, it’s time you learnt to be fluent. Understanding how markets operate, what affects price fluctuations and key value indicators are all important things you need to know to make sound investment decisions. Getting up to date on the mechanics of how the market works is learned both by doing and by studying. Booktopia has an incredible range of finance books that can help you get started. We recommend checking out The Intelligent Investor by Benjamin Graham and The Essays of Warren Buffett: Lessons for Investors and Managers by Lawrence A Cunningham.
Understanding your stocks
Being an investor in stocks means quite literally that you are part owner of a company. And as a part-owner of a company, it’s essential to know what your company does well and what it could do better. Understanding the company you have invested in is important for understanding why it’s valuable and why it’s worth investing in (or selling). There are a lot of ways to go about understanding your stocks, both qualitative and quantitative. Lean on helpful investor resources and tools like Motley Fool help simplify complex financial analysis into simple, actionable insights.
Understanding key industries
Finally, the third area you need to be informed about is the key industries that may affect the companies you’ve invested in. If you own shares in a car company, understanding how the metal industry is performing may have flow-on effects to the future growth of your car company. By understanding adjacent industries, you’ll be able to see future opportunities or threats that may affect your investment decisions. iSubscribe is a cheap and easy way to access leading financial publications like The Economist and Bloomberg Businessweek. Sourcing information from these publications can create an excellent foundation for building your industry knowledge.
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