How to grow your wealth with shares

Estimated reading time
 5 min

In this article

• How to invest in shares
• Different types of shares you can buy
• The pros and cons of investing in shares
• Reducing the impact of loss aversion

Ever wanted to own a tiny part of your favourite company? Well, it might be time to invest in shares.

A share is basically a single unit of ownership in a company or organisation. And if the business you have shares in does well, so will your investment (and finances!).

Remember, always do research before investing. Read the T&Cs and product information, find out more about the risks and benefits and consider any fees and charges. You might also want to consult an advisor to get independent financial and tax advice for your circumstances.

If you’re ready to grow your wealth through the power of shares, then dive right in to learn more.

How does investing in shares work?

The first step to buying shares is to choose whether you want to fly solo through an online brokerage service or get a full-service broker to do the work for you.

An online broker service puts you in control of your shares. Online brokers allow you to open an online trading account to buy and sell shares yourself. But you’ll usually have to pay a fee each time you decide to buy or sell.

By contrast, a full-service broker does the work for you. Plus, you’ll have someone to give you advice on the best Australian shares to invest in. The fees you’ll have to pay are typically a percentage of the share’s value, so it pays to do your research before choosing your broker.^disclaimer

How to earn money from shares

If the company you have shares in experiences financial growth, then you can potentially claim it in two different ways:

• Share price growth is basically the value of how much your share has increased, which means you can sell it at a higher price.
• Income paid as dividends is when the company you have shares in pays you some of the profit they earned.

You can, of course, try your hand at investing in international shares to geographically diversify your investments – a fancy term for spreading your investments internationally. Though you’ll have to consider currency conversations and any tax implications for making overseas investments.

For most everyday investors, shares are often seen as a long-term investment. This means that you’re more likely to hold onto the shares for a longer period of time so that you can weather smaller fluctuations in the market in favour of long-term growth. However, some investors do take a more active approach to share investing with the aim of buying and selling shares more quickly in response to the current market – this can be a riskier approach if the market doesn’t respond the way you anticipate or if you sell too early or too late.

And if you’re wondering how much money you’ll need to invest in shares, it’s generally around $500 at a minimum plus fees for your broker to get your started.

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What are the types of shares?

1. Ordinary shares

Most of the shares you’ll see on the Australian Securities Exchange (ASX) are ordinary shares. When you buy them, you won’t have any special or preferred rights in the company. If you have an ordinary share, you usually have the right to vote at the company’s general meeting and can participate in the distribution of dividends or other assets.^disclaimer

2. Preference shares

A preference share gives you priority over other shareholders for dividend payments and during the winding up of the company – when a company shuts down and sells its assets, distributing any remaining funds to shareholders.

3. Partly paid shares

A company might issue a partly paid share, which means you only pay a portion of the share’s full price upfront. This is a great benefit for new investors who want to buy shares at a lower price. But the company you invested in can ask you to pay the outstanding amount you owe. Once you’ve paid the remaining amount, you’ll officially own the share in its entirety.

If you own partly paid shares, you’ll have the same rights as the owners of ordinary shares. But those rights are proportional to the amount you have paid for the shares. For example, if you only paid 50% of the total share price, your voting power and dividend entitlements may be adjusted to reflect this.

What are some of the pros and cons of investing in shares?

• Pro: Buying and selling shares can be a cost-effective strategy in comparison to other types of investments. If you go through a broker, you will need to factor in any fees they charge.
• Con: You might struggle to sell your shares if the company you have invested in performs poorly, which might mean the sale price of your shares ends up being lower than what you paid.
• Pro: You could use shares to earn a passive income.
• Con: Share prices are volatile, meaning they can rise and fall quickly – so you’ll need to understand that the value of your shares can (and most likely will) fluctuate.
• Pro: You have more control on what industries and sectors to invest in, which can help you meet your specific investment goals.
• Con: If you invest in shares overseas, you need to be aware of currency conversion. You might end up losing money when you convert your earnings into Australian dollars.

 

 

 

Focus on the benefits of investing in shares (not loss aversion!)

Let’s say after buying shares, the company you’ve invested in isn’t doing too well. They released a new product that didn’t take off, so the share price (and your investment) drops. You might feel disheartened and decide to sell your shares at a loss. But if the reverse happened – they release a good product and your investment increases – then you might feel just okay about it.

This tendency to focus on the negative is called loss aversion, where we feel the pain of loss more strongly than the gratification of earning a profit. When you invest in shares, there’s always the risk that you’ll lose money. But there’s also the chance that your shares can increase significantly and you can earn more money than you started with.

To reduce the impact of loss aversion when it comes to investing, it helps to understand your risk appetite. When you do, you can choose an investment option that reflects your level of risk and goals. And consider diversifying your portfolio so that you’re spreading the risk across multiple assets, instead of fully backing one investment type.