The basics of the share market – how it works and other technical details – have been covered in the first part of this guide.
This next instalment of our share investing guide will tackle the question of what it means to be a shareholder, how to make a profit, the risks and other essential facts. Keep reading to learn more!
5. What Does it Mean to be a Shareholder?
You become a shareholder when you buy shares. This implies that you, together with other shareholders, own a portion of that firm or asset. Being a shareholder has advantages and disadvantages, which are addressed below.
Shareholders have the opportunity to profit from growing share prices and earn money from the company’s profit distribution. Other rights and privileges are also available to shareholders.
As a shareholder, you can vote on board resolutions and influence how the company or asset is administered. You also have the right to attend the company’s Annual General Meeting (AGM).
You will also receive continuous updates and information about the company’s success to help you decide the long-term worth of your investment. Depending on the firm or companies in which you invest, you may have additional rights and duties as a shareholder.
6. How Can You Make Money in Shares?
Capital appreciation is the primary method to make money in the share market. This means that you buy shares in a company, and then the value of those shares increase.
Capital appreciation can occur through growing profits and market demand.
You can make money by investing in shares that pay dividends, although this is less common in the Australian market.
Dividends are payments per share that are made to shareholders based on the company’s profit. When you receive dividends, the amount is often substantially less than the capital gain you would have made if you had just held onto the shares.
7. What are the Risks of Investing in Shares?
When you invest in shares, there are many risks that must be considered.
Share prices are very volatile and fluctuate quite a bit. For example, from 1 April 2009 to 31 March 2010, the ASX All Ordinaries Index increased by 20.1% – this means that $100 invested in the index in April 2009 would be worth $120.10 by April 2010.
Share prices are very sensitive to market forces and can fluctuate due to external factors such as interest rates, changes in government policy, natural disasters, and international conflicts.
There are different types of risks when buying shares.
Systemic risk – which is the risk that the whole stock market will fall while you own shares in companies.
Within this risk, there is specific company risk, which is the risk that a company’s share price will fall, and sector risk, which is the risk that a market sector will fall (for example, the technology sector).
Business risk is the risk that a company you have invested in will perform poorly or go bankrupt.
8. Who Can Help You Get Started in Shares?
If you are ready to invest in the share market, a good place to start is to engage a financial adviser to guide you.
When choosing a financial adviser, ask them about their services and ask to see examples of their client’s portfolios. Ensure that they have a financial services license, and check whether they are members of a professional body, including the Australian Securities and Investments Commission (ASIC) and the Financial Planning Association of Australia (FPA).
If you’re looking to make money work harder for you, then investing in shares might be the way to go.
It’s important to understand the risks and seek qualified advice, but once you understand how shares work and how investing can benefit you, you should be well on your way to creating a solid financial future.
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