If you’re enrolled in KiwiSaver, you may have learnt a bit more about what shares are and how they work. But how do you buy them outside of KiwiSaver, how do you make money, and what should you look for? Our handy guide can help.
What are shares?
When you buy shares, you’re buying a tiny slice of ownership of a company. This makes you a shareholder in that company. Shares, sometimes called stocks, securities or equities, are bought and sold on the share market.
Why do people invest in shares?
Shares are often used to grow wealth, as part of a wider investment portfolio.
The two main ways you make money from shares are:
- Through a dividend. Some companies distribute some of their cash to their shareholders. This is called a dividend and provides you with cash income.
- Through capital gain. You buy shares in the hope their value will increase over time. Then, if you sell them at a higher price, you’ll make a profit.
What are the risks involved?
All investments come with risks, and it’s important to weigh these up and do your research before investing in any financial product, including shares.
- You could lose money. The company you buy shares in may go out of business completely. Or, if you’re forced to sell your shares earlier than you planned, you may sell them at a lower price than you paid for them. You are not guaranteed to make any money with any share investment.
- Shares are long term. For most people, shares are bought for the long term. This strategy is known as ‘buy and hold’. This means the share price may rise and fall over the short term, based on the company’s performance and the economic climate. But over the long term - 10 years or more - you’d expect the value to hopefully increase. Some people buy and sell shares regularly in the hope of making money, which is known as trading.
- Diversify your portfolio. Experts recommend diversifying your investments - or, avoiding putting all your eggs in one basket - to help reduce your risk of losing all your money. Investing all your money into one company is high risk. What if that company goes out of business? But if you invest in a range of different companies, across different industries and countries, it’s unlikely their share prices will all reduce in value at the same time. It’s also good to spread your money across different types of investments, for example – shares bought directly or in managed funds, bonds, property, and cash (savings accounts and term deposits). This can happen in your KiwiSaver and you can also invest outside KiwiSaver if you have additional money and you want something you can access before you retire.
- Be wary of scams. There are always investment scams circulating and many appear very realistic. Investment scams usually offer very high returns for low risk, and you may be tempted. Kiwis lose millions of dollars in investment scams every year. Read more about investment scams and how to avoid them on NetSafe. The FMA also posts details around investment scams new to the market.
You can buy shares in different ways.
- Through a broking firm
- Through an online platform
- Through a financial adviser
You may be looking for support with your share buying, or help with the actual purchase process. Check platforms and broking firms are NZX registered, and make sure you find out all the costs involved. If you have a very small amount invested, high upfront fees might not make it worthwhile (though there are some online platforms that offer low-cost options). Some offer research and reports to help you make informed decisions. Do your own research too.
What companies you buy shares in is your personal choice. You might want to invest in a company you know and love, or a new industry you’re passionate about. Or maybe a well-known successful business, or a new kid on the block. Do your research (such as company reports, financial statements, product disclosure statements, the share price history, and announcements) to make sure you make an informed decision.
Other ways to invest in shares
There are ways to invest in shares without having to pick your own shares. This can be a good option if you don’t have time to research companies, or don’t want to.
Your KiwiSaver account is a great introduction to share investing. KiwiSaver accounts are made up of a mixture of investments, usually shares, bonds, and term deposits. If you’re in a higher-risk growth fund, you’ll be investing in a higher proportion of shares than a lower-risk conservative fund. Your KiwiSaver balance goes up and down mostly because it’s invested in shares on the share market. Most providers don’t let you pick the shares yourself, but it’s a good way to get comfortable with the ups and downs that come with share investing.
Managed funds generally invest in a range of assets, often including shares and property, bonds, term deposits, and cash. They’re run by a ‘fund manager’. Pie Funds, the issuer of the JUNO KiwiSaver Scheme, is a fund manager. Pie Funds has a range of different funds outside KiwiSaver that you can invest your money in. Managed funds can be actively or passively managed.
- Exchange-traded funds (ETFs)
ETFs are usually made up of a collection of shares that follow a market index. One example is the Smartshares New Zealand Top 50 ETF, which tracks the performance of the 50 largest companies listed on the New Zealand Stock Exchange. ETFs are usually passively managed so are often cheaper, because you’re not paying for an investment team researching, picking and trading individual shares.
Want to learn more?
Here are some great resources for learning about shares.
Published 28 May 2020
Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with an independent financial adviser. All content is correct at time of publication date.