Looking to play the market? There are plenty of ways to invest in shares, whether you have lots of money to throw down at once or you'd prefer to 'drip-feed' small amounts into a share fund over time. CHOICE can help you decipher the confusing jargon and show you some of your options, including:
- buying shares directly through a stockbroker
- letting an expert do the hard work for you with a managed fund
- tracking the market with an index fund or exchange traded fund
- putting your money into superannuation.
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Managed funds
If you don't have the time, expertise or money to build a share portfolio by buying directly, consider buying units in a professionally managed fund. Managed funds pool investors' money and do all the buying and selling of shares and other assets for you. They don't do it for free – you pay fees for the fund management.
There are thousands of managed funds on the market, including sector-specific funds that invest in a particular asset or industry (such as Australian shares or international property) and multi-sector funds that spread investors' money around a mix of asset classes (cash deposits, fixed interest, shares and property). This diversified approach spreads your risk, but it's difficult to predict which managers will perform best.
Factors to consider
- Provider: Is it a well-known financial services company with a strong track record?
- Performance: While past returns don't indicate future returns, look for a fund that has performed consistently well against its peers and benchmarks over the medium and long term. Don't just go for last year's top fund as it's unlikely that short-term return will be repeated.
- Amount: Plenty of funds let you get started with as little as $1000.
- Excessive fees have a negative effect on your investment returns, so don't pay too much. Annual management fees are deducted from your fund's balance each year. Other fees can also apply, including an entry fee percentage of your contributions, but much less through a discount broker. If you invest through a financial planner, fees are negotiable.
- Research where your money will be invested, including the mix of assets, sectors and companies.
- Study the managed fund's PDS – it should tell you most of what you need to know about the investment you're entering. It can be very dry reading, but if you put in the hard yards now, you won't get any nasty surprises later on.
Index funds
Index funds are one of the cheapest ways to invest in either the whole Australian share market or a portion of the index. These funds take the opposite approach to actively managed funds in which fund managers try to outperform their peers and chosen benchmarks. Instead, index funds attempt to track a safe benchmark.
For example, an index manager might offer an Australian share index fund that aims to replicate, before fees, the performance of the S&P/ASX 300 Accumulation Index. Such index funds are "unlisted", because they're not quoted on the Australian stock exchange. Like managed funds, you buy units in an index investment from the fund manager, or through a financial adviser or broker.
The main advantage of index funds is their low fees, usually less than one per cent per annum. On the downside, index funds won't outperform the market they track or their chosen benchmark. Share index funds will invest in both poor- and well-performing companies, and may be less diversified than managed funds that invest in a range of asset classes (cash, bonds, property and shares).
Exchange traded funds
Exchange traded funds (ETFs) are the cheapest way to track the performance of a particular share index. Unlike the unlisted investments in index funds, ETFs are index funds that are bought and sold like shares. Their main benefit is low fees, which can be as low as 0.29% for an Australian share fund. These listed funds also allow you to get instant diversification – with one trade you can become a part-owner in hundreds of companies. Like any other share, you'll need to go through a stockbroker or online broker to buy ETFs, so consider broker costs in your decision.
Despite their low costs and accurate tracking of chosen share market indices, not many financial planners recommend investing in ETFs, perhaps because they're not authorised to do so, or ETFs don't pay them sales or advice commissions (to the extent that they're allowed under current rules). Fee-for-service financial planners who aren't reliant on commissions may be more likely to recommend investing in ETFs.
Superannuation
Think you've never dabbled in shares? Chances are you're already investing in shares through your superannuation fund. About seven out of ten Australians are in their employer's default fund, which is where your money goes if you don't make an active choice. The default is often a "balanced" option that invests in a mix of assets, including cash and fixed interest, and 60–75% in property and shares.
Some super funds enable you to trade individual shares that are listed on the Australian Stock Exchange (trading fees apply). If you go down this path, it's a good idea to make sure your super fund portfolio remains diversified between different companies, sectors and types of investments. Don't put all your eggs in one basket.
Global trading
The Australian index is a very small part of global share markets as a whole. You can buy shares from other countries through stockbrokers, managed funds, index funds and exchange traded funds. Broker fees for international trades are higher and it's not always possible through some online broker packages.
Useful websites
Jargon buster
- Blue-chip shares: While the term might convey a perception of safety or quality, blue chip really refers to the size of a publicly listed company. In fact, the original term came from the gambling world, as the highest value casino chips are blue. There's no strict rule for what qualifies as blue chip, but one definition is a company with a market value over $1 billion.
- Averaging in: Also known as "dollar cost averaging", this is a strategy for buying shares by regularly investing. You might decide to put $100 into a share fund on the first Monday of every month. As the price of shares rises and falls regularly, your $100 will buy more shares when prices are weak and fewer shares when their prices are higher. Over the long run, the prices average out. This approach doesn't guarantee profits, but can smooth the ups and downs.
- Share index: A way to measure the value of a basket of shares. The S&P/ASX 200 index, for example, represents the market value of our 200 largest public companies. It's a "capitalisation-weighted" index, meaning that the size of a company determines what proportion of the index it represents. A change in BHP's share price, for example, would have a bigger effect on the index than the same percentage change in a smaller company's share price.
- Points: The value of most share market indices is measured in "points", which represent the value of all the companies with shares on the index.
- Price-to-earnings ratio: This is a share's price divided by the company's annual earnings per share. It's one of the key measures used to assess the attractiveness of a share's price for investors, although it's just one part of the puzzle.
- Dividend yield: A dividend is what's paid from company profits to shareholders. The dividend yield is the annual dividend divided by the company's share price, expressed as a percentage. You can choose to receive your dividends as a regular income (they're usually paid every six or 12 months), or use the dividends to buy more shares (known as a dividend reinvestment plan).
Warning! Shares don't always rise in the long term
Don't believe the hype – there's no guarantee that shares will rise. Given the last decade of ups and downs all over the world, this bears repeating. While some Australian investors have been lulled into thinking our share index will always go up in the long term, other countries have had a very different experience. If you decide to take the plunge and invest in shares, make sure you understand the risk of further market declines and continuing volatility, and consider getting licensed financial advice.
Your share buying options:
Buy your own shares
You'll need to use a stockbroker to buy individual shares. If you don't want investment advice, the cheapest way is through an online broker. Their fees range in price and are charged per transaction.
For investors who want advice or to deal in large amounts of shares, a full service broker could be the way to go. They usually charge a commission for share trades, with a minimum fee. The percentage fees are reduced for very large trades (six figures), while the cost to buy international shares is higher. Their recommendations are covered by the fee, and must be provided in a written 'statement of advice'.
Check all fees and read each broker's financial services guide and product disclosure statement (PDS) before choosing who to invest through. All the major banks have an online stockbroking arm which offers a range of services to help you research, including daily market commentaries, analysts' research, independent ratings agencies' research, and company profiles.
You generally need plenty of money to make direct share purchasing work, otherwise broker fees could make it uneconomical. One of the basic principles of investing is to spread your risk by diversifying; if you invest all your money in just one or a handful of companies' shares, you'll be seriously affected if any suffer a major price decline or collapse.
Stock images: Getty, unless otherwise stated.
