Five tips for buying shares

Deciding to buy shares should be given careful consideration and before you hand over your heard-earned money, consider these five tips to see if investing is for you.

Shares can be purchased either indirectly or directly. Purchasing shares indirectly is generally done through a ‘Managed Fund’ where you buy units in a fund with other investors, and collectively the fund purchases a range of shares according to the funds objectives and trust deed rules. The fund managers make the investment decisions, conduct the research and maintain the fund on your behalf.

Purchasing shares directly allows you to specify the company based on the area of business or trade it is involved in. You also determine the time you own shares in the company.

Before investing in shares or any investment for that matter, you should take steps to ensure it is appropriate to your circumstances and potentially minimise problems down the track. Consider the following five guidelines when buying shares directly:

  • Only invest funds that are surplus to your immediate needs. For example having adequate money on hand for your day-to-day living expenses and to service any debts or other expenditure you could reasonably expect in the short term is essential. Money used for these purposes should be in lower risk investments or accounts. Shares should be used as part of an overall investment portfolio to increase diversity and provide potential for capital growth in the medium to long term.
  • Unless you are an active trader, it is suggested investing in shares is a ‘long term’ investment so try to set yourself a minimum time frame (usually five years). This is to avoid the need to sell shares in the short term, where the performance hasn’t met your expectations.
  • Be sure to research the company thoroughly. Research its operations, management and performance, its exposure to risk and ensure the prospects of the company are sound. Remember a number of factors can influence a share price and be aware of issues that pose a risk for the company or the sector of the market in which it operates. Known as risk factors, these can include economic risk, management risk and legislative risk to name a few.
  • Remember the value of the shares will fluctuate. So if soon after you purchase shares you see the value fall, don’t panic and sell up. Consider your original time frame (as discussed in the second point) and allow the share price a chance to recover and hopefully offer a good return over that period. It may also be the case that the shares still offer good dividends even if the value has reduced. This was the case with certain shares after the ‘Global Financial Crisis’.
  • If you are able to do the research yourself and decide on what shares to buy, shop around for competitive share trade deals. Often online share trading can be cheaper than using a broker. If you are unable to research what companies to invest in, you need professional advice from a registered/licensed stockbroker. In this instance you should also shop around as the level of service and cost can vary amongst brokers. Visit the Australian Stock Exchange website for information on trading shares and seeking a stockbroker

For more information on shares refer to NICRI’s ‘shares’ leaflet and to learn more about risk and the factors that can affect share performance refer to NICRI’s booklet Safety, Risk and Scams.

Prior to acting on information provided in articles, NICRI strongly recommends you confirm details in relation to your personal circumstances with any relevant government department.

If you require further information on investments and retirement investment products please contact NICRI toll free on 1800 020 110, email [email protected] or write to PO Box 1339, Fyshwick ACT 2609. Information leaflets are also available on websites www.nicri.org.au © or and //moneymap.nicri.org.au.

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