What is investing?
Investing can be a way to secure or even improve your financial standing. If you’ve been watching the news lately, you may have heard references to inflation. Inflation causes the prices of goods and services to increase over time, meaning the value your cash has today may not have the same value it had one, five or 15 years ago.
Investing in the share market can be a way to help you create additional passive income streams, which you can use to maintain or grow your personal wealth – however, all investing holds certain levels of risk. As well as making a profit, you could also experience a loss.
What types of investments are there?
There are a few different ways to get your money working for you. Investing in stocks is only one of them. Another popular example is investing in real estate.
For most Aussies, there are two main options they consider when it comes to investing in real estate. The first is purchasing a property to live in, which likely becomes their main asset. Owning the place you live in means you’ll have tax benefits (i.e. no capital gains) and peace of mind that you’re on the ‘ladder’ and setting up your own home. Whereas investing in a property to rent out, while you rent and live in an area you may not be able to buy in, is another approach – sometimes known as rent-vesting.
You can also consider using a high-interest savings account - which can be a good way to help maintain some of the value of your existing savings. The current increases in interest rates may actually benefit you if you’re taking this approach because, in a nutshell, the interest on your savings account also goes up – hello extra dollars. It’s worth noting, though, that this form of investment is low risk, and therefore delivers low returns – so won’t significantly boost your cash flow.
While the stock market is susceptible to economic volatility, it may give investors more control over what they want to put their money into. It also tends to yield higher returns in the long run. According to the Vanguard Australia Australian Share Performance 2022 index chart, a savings account offers on average 2% to 3% return on investment, while the average annual return on the stock market over the past 30 years was 9.8%. Plus, you don’t need a lot to get started, so it’s easy to dip your toe in and add to your portfolio over time.
What types of stocks are there?
When it comes to investing, the Australian Securities Exchange (ASX) offers a huge variety of investment options. It’s also worth noting that Australia makes up only about 2% of the global share market, according to recent Statista data, so there are plenty of international investment opportunities you can consider, too.
With the ASX, you may be surprised to learn that it goes well beyond single shares and ETFs. The four most common options include:
• Shares are an investment in one individual company. When you invest with a company for the first time, you’ll usually need to make a minimum investment of $500. After that, how many shares you buy is dictated entirely by you and your budget.
• Exchange Traded Products (ETPs) represent a selection of stocks that share, for example, a particular industry or theme. Rather than buying shares from just one company, investors purchase a bundle of shares. Exchange-traded funds (ETFs), exchange e-traded managed funds (ETMFs), and single asset exchange-traded products or structured products (SPs) also belong to this category.
• A managed fundis a type of investment where your money is pooled together with other investors and managed by a professional. The funds are used to buy assets like Aussie or international shares, bonds, property or cash.
• Bondsare essentially loans from a private lender to a borrower. In exchange for the investment, the lender receives regular dividend payments until the life of the bond expires and the borrower repays the loan.
Understanding your ‘why’ is key
Before you jump onto the share market, it’s important to understand why you want to invest. For some, it might be wanting to supplement your super, while others might see it as a boost to their salary. Depending on your strategy, investing could help you save for a house, a car or your dream holiday. Whatever you have in mind, having a financial goal can help you determine a suitable investment strategy.
What are you willing to risk?
All investments come with a certain level of risk. The question is: how much risk are you comfortable with? Generally, high-yield investment opportunities may come with greater market fluctuations and therefore greater risk. But if things do go your way, they can yield a greater return on investment. Similarly, lower-yield investments may carry less risk and therefore more stability. They too can yield great results, especially in the long run.
Understanding the market
The share market can be difficult to navigate, especially for anyone who’s new to this form of investment. Conditions can be volatile and change from one day to the next – potentially causing a loss in your investment portfolio. You may need to wait it out before seeing returns again as the share market is dependent on economic confidence.
You may have heard of a “bull” market and a “bear” market, but what does that mean? A ‘bull’ market usually means economic confidence is high and stocks are performing well, so chances are shares will do the same. The opposite might be true for a ‘bear’ market. When confidence in the economy dwindles, investors tend to be more careful with their money. This means stock prices may fall, and the recovery phase may take longer.
While there is no guarantee for success, the best thing you can do is learn as much as you can about the market and its fluctuations.
