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Taking a stake

When you buy shares in a company on the stock market, what you are doing is becoming a part owner in that business.

Your stake may be small, and there may be tens of thousands of other co-owners, but your own investment will rise and fall with the company.

The value of the shares themselves will change over time – and hopefully increase – and you may also receive dividends, which are effectively a distribution of the profits.

The sharemarket functions simply as a place where shares can be bought and sold quickly and efficiently.

With modern technology you can buy and sell online within seconds.

This idea of liquidity is one reason why sharemarket investment has become so popular.

But as with any investment, there are pros and cons to investing in shares, which are also known as securities, stocks or equities.

Here’s a list of Benefits and Risks, as published on the MoneySmart website of the Australian Securities and Investments Commission.

The benefits
  • Potential capital gains from owning an asset that can grow in value over time
  • Potential income from dividends
  • Lower tax rates on long-term capital gains

The risks
  • Share prices for a company can fall dramatically, even to zero
  • If the company goes broke, you are the last in line to be paid, so you may not get your money back
  • The value of your shares will go up and down from month to month, and the dividend may vary

 

Choosing shares:

With so many companies to choose from, it takes research and time to select the companies you want to invest in and build your portfolio. The ASX – the Australian Securities Exchange – has some information which serves as a good starting point to understanding the market, and how to judge if a share is performing well.

Managing your shares:

People have different approaches to shares. Some will buy the big companies – the so-called “Blue Chips” – and will hold them for many years. These companies traditionally pay attractive yearly dividends, and these are popular with retirees, who like a regular income stream.

Other investors take the “day trader” approach, buying and selling frequently on small changes in prices. To do this, however, requires a lot of time and focus.

Regardless of what kind of investor you are, it pays to keep a constant eye on how your portfolio is performing. This will mean you can intervene if something starts to go wrong, or can take advantage of opportunities when they arise.