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Introduction

Relative to property, cash and fixed interest investments, shares are a higher risk investment offering potentially higher returns over the longer term. Investing in shares is most useful in achieving capital growth. If you do invest in shares, your investment horizon should be at least five years.

Shares represent a part ownership or share in a company. A business offers shares to the public primarily as a means of raising capital to enlarge the business. These shares can then be bought and sold. The most common, safe and convenient method of trading shares is to buy and sell them through a broker.

Through your shares in the company, you own a proportionate share of that company, based on the total number of shares on offer. You'll share in the success and failure of the company. You'll share in the income of the business through a distribution of its income, made as a dividend payment. Hopefully, you'll also make a capital gain, as the value of the company increases over time, along with the value of your shares.

Some New Zealanders are still suffering from the fateful blow that Black Tuesday, in October 1987. Many lost a lot of money (and, in some cases, the shirt from their backs) and the New Zealand share market has, until recently, by international standards, been a poor performer ever since.

However, the Shape of Money believes that all investors should have a balanced portfolio which includes each of the three investment classes. Potentially a large proportion of your funds should be in New Zealand and overseas share investments.

Why invest in the share market when I might lose my shirt?

  • Of shares, property, cash and fixed interest investments, shares have consistently been the best performer. Most of the books listed in our Resources section will demonstrate the returns of these investments over both the short and long-term.
  • You shouldn't lose your shirt if you follow three basic rules.
  • Never borrow to invest in shares.
  • Invest for the longer term. Ignore daily, weekly and monthly movements.
  • Diversify your share investments in different industries and countries.

There are a number of ways to invest in shares

Direct
A direct investment in shares is one in which you decide which shares to buy and sell. There are some advantages to this approach: you don't have to pay someone else to make decisions, and it can be fun. However, there are disadvantages also, in that successful long-term investment can take both skill and discipline, while investing directly overseas can be difficult. You need to ask yourself whether you have the ability and patience to make this option work. If you want more information and assistance, please review our topic on Shares.

Unit Trusts
Unit trusts are a very good vehicle for share investments. There's a cost associated with this, but your investments are in the hands of a professional. There are a large number of managed fund options which also allow you to easily invest in overseas markets.

Unit trusts - active vs passive investments

The following is a summary of the main differences between investing in actively or passively managed unit trusts.

Characteristic Active Passive
Management
Style
Based on their analysis and
research, the fund manager
will try to maximise returns
by out-performing both
competing funds and
relevant indexes.
Buy and sell only to
match a chosen index.
Returns May be either higher or lower
than the relevant index.
Research tends to indicate
that itís difficult for individual
funds to regularly beat the
relevant indexes.
Will closely approximate
the chosen index.
Tax Funds pays tax on capital
gains.
Funds currently does not
pay tax on capital gains.
Volatility Fund should be less volatile
than the relevant index, due to
the capital gains tax (or
credits on losses).
Will approximate the
chosen index.
Costs Higher Lower

Summary noteThere are advantages to both styles of management:

  • Active - potentially higher returns and less volatility,
  • Passive - lower costs and tax advantages.

A useful strategy may be to utilise both styles of management in your portfolio, in order to benefit from the advantages of the two differently styled funds.

Additional information and resources

As with all investments, read as much as you can on the topic.

There are a number of useful books in our Other Resources (Shares) section you could consider buying or borrowing. In addition, most of the books in the savings and investment section include a few chapters on share investments.

There are a variety of useful resources dedicated to share investments at Other Resources (All Things Shares and Equities).

The NZX has a guide How to Invest.

There are numerous links on our links page: Shares - NZX Firms and Shares - Other.