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A Beginner's Guide to Investing in Shares
Share prices can rise and fall dramatically, giving share markets the same sense of glamor and danger as a casino. But is investing in shares really that risky? And how do you get involved in the share market? Here are some of the answers.
Q. How do I go about investing in shares?
A. You can buy shares from the company issuing them - for example, when a private company or Government body "floats" or becomes a publicly listed company. These opportunities are fairly rare. More commonly, if you want to invest directly in certain shares, you need to go through a stockbroker who buys and sells shares listed on the stock exchange. In both cases, it is best to have some financial knowledge (or else seek professional advice) about how to choose a good investment, how to monitor performance, how to fine-tune your portfolio and how to read the financial pages.Alternatively, you can leave the important decisions to the professional investment managers by buying units in a managed fund. Managed funds work by pooling together money provided by many investors. This gives the fund greater buying power, and allows access to markets that are usually closed to individual investors. Funds managers offer various types of funds which have different investment styles and patterns.Before buying into one of these, read the prospectuses of different funds offered by several funds managers. Compare past performances, but keep in mind that past success is no guarantee of future success because sharemarkets can be unpredictable. Also, don't forget to compare their fees. Funds managers may charge entry and exit fees, as well as management fees. Keep in mind that each company will try to sell you its product, so it's a good idea to consult an independent financial adviser.
Q. Do different stockbrokers offer different services?
A. Stockbrokers tend to fall into two classes: discount and full-service brokers. A discount broker will merely carry out your order, often for a fairly reasonable fee. You can deal with them over the phone, and, in many cases, via the Internet. As well as executing your order, a full-service broker will often provide you wih recommendations on what shares are, in their opinion, a good buy or are overvalued. Of course, this extra service comes at a cost - a higher commission.
Q. How can the risks be reduced?
A. When it comes to the share market, rule number one is: "Don't put all your eggs in one basket." Distributing your money across different markets spreads out your risks.
A good portfolio requires a mix of shares over a range of companies, industries, even countries. Putting such a portfolio together yourself is time-consuming and requires some knowledge of the markets - so seeking expert advice is wise.
Share markets can fluctuate in the short term, so you really need to be committed to making a long-term investment. By long term, I mean five to ten years. If you are trying to save up for next year's holiday, shares are not the way to go.
Q. What are share floats?
A. Public companies have their shares listed on the stock exchange. When a body wants to become a public company, it issues a share float - that is, it seeks subscriptions from the public. The body wishing to become listed is often a private company that wishes to expand, or it might be a mutual organization that decides to demutualize and be run along more corporate lines.
Q. Are share floats "safer" than other shares?
A. Buying shares via a float can be just as risky as buying shares in any other way. Although there have been some successes, there have been no shortage of flops either.So, when buying into a float, ask: What is the business' existing value? What is its ability to increase its earnings? How is it priced relative to the market? What is the price earnings ratio, and so on?Most of this information can be gleaned from the prospectus which a stockbroker or financial adviser can analyse for you.