What role do shares play in your investment?

There are many types of investments available, including shares, real estate, commodities (like gold) and cash. An investment fund or product can be made up of a number of investment types. In this article, we help you understand shares and the role they may play in your investment. 

Shares (also known as stocks or equities) are units of ownership in a company. If you purchase shares, you’re essentially buying a small part of a business. 

You can choose to invest in shares directly, or your super or investment fund may invest in shares for you. For this reason, it’s important to understand how shares work, what the potential benefits and risks may be, and how movements in markets and your stage of life can also play a role. 

How do you invest directly in shares? 

You can buy (or sell) shares directly through a broker or brokerage service that transacts on your behalf on stock exchanges like the Australian Securities Exchange, New York Stock Exchange, or Nasdaq.  

Investing in shares directly may increase your chances for higher returns (if you happen to make the right selection at the right time!) and may give you access to a larger universe of options. 

Are there other ways you can invest in shares? 

Aside from investing directly, you can also invest in shares through things like your super or products like managed funds or exchange traded funds. 

While you can’t choose the specific shares you invest in, this may be more cost effective as a professional fund manager, like CFS, is investing your money for you. 

The major difference here is you’ll generally have access to a wider range of asset classes (in addition to shares) through these products, including those you might not be able to invest in as an individual (such as commercial property). 

Having your money invested across a range of asset classes can diversify what you’re invested in and at the same time potentially reduce your exposure to risk. Because the fund manager is doing the work for you, it may also save you time researching and choosing what to invest in. 

What are the possible benefits of investing in shares? 

1. You could invest in shares directly or through a variety of different investment products, such as those mentioned above, which makes them easy to access. 
2. You can reap good returns if a company that you hold shares in significantly grows its profits and its value increases over time. 
3. A company may return a portion of their profits in the form of dividends, which you can receive as cash, or potentially choose to reinvest in more company shares. 
4. You can invest across multiple industries and countries which could help to diversify your investment in shares and reduce risk. This is because poor performance in one area may be offset by another.  

What else should be considered if you’re investing in shares? 

1. Shares may come with attractive returns when markets are favourable or sectors are gaining momentum, but they can be turbulent.  
2. You also need to consider the tax bill if you sell shares for more than you bought them for, as you’ll generally need to factor in capital gains tax, which may also apply if you inherit shares. 
3. When investing in shares there is the potential to lose all your money if a company goes bankrupt – a risk that may be reduced by diversifying your exposure.

We’ve seen share markets crash at times, such as during the global financial crisis and at the start of the pandemic, but the good news for longer-term investors is history shows markets generally bounce back. 

How does age affect your investing goals?

Investing in shares is often seen as higher risk for higher returns, so this type of investment may be more attractive in your younger years as you generally have more time to ride out market highs and lows. 

As you get closer to retirement, exposure to shares can be riskier, which is why you may consider a more conservative approach. This is why it’s also important to regularly review your investments, particularly at different stages of life. 

What other things should you be aware of? 

Investing in share markets can be lucrative but also comes with risks. While returns may be better when markets are buoyant, losses can be more detrimental during market downturns. 

Diversification can reduce risk by investing in a variety of investment types, industries and sectors. If the value of one investment falls, the value of another will potentially create a buffer. 

Speaking to your financial adviser may help you to make more informed decisions about your investment strategy and the role shares could play in it.

If you don’t have an adviser, you can use our find an adviser service.