Why invest in shares?

Given the plethora of investment options available these days, a reasonable question that one might ask themselves is ‘why invest in shares?’

Buying shares involves buying into a company. That is, once you purchase shares in a company you become a part owner, along with the other shareholders.

This ownership entitles you to a share in the profits that the company makes, equivalent to your shareholding.

It also allows you to benefit from value created by companies who have a successful management team, operate with a competitive advantage, and who can consistently increase their profits and market share.

One of the main reasons why investors buy shares is that they are looking to build wealth through capital growth, particularly over the long term, but they may also be used to generate income through dividends.

Capital growth occurs when the business grows and its profits increase in real terms, creating an increase in the company’s value. Generally speaking, this value is then reflected by an increasing share price.

Share prices can be volatile, however, and sometimes the market can underestimate a company’s worth, allowing the share price to languish or, alternatively, overestimate the share price, allowing it to run too far ahead.

Given this, new entrants to the market can often benefit from seeking the advice of professionals who will help to guide the investing process when first starting out.

Owing shares can also provide a benefit through the payment of dividends. Most companies who make a profit will pay a portion of those profits back to the shareholders on a regular basis, usually annually.

Dividends are paid on the proviso that they are approved by the company’s directors and that the company has made a profit, from the current year or in years past.

Most Australian companies have paid regular dividends as their profits have increased. Companies may even be able to pay dividends in lean years, using profits from previous years to continue making payments to shareholders.

If investors are particularly interested in dividends, they may wish to check the history of the company they are looking to invest in to see if the company has paid regular dividends.

Over the past 100 years, real returns after inflation for Australian shares listed on the stock exchange have averaged around 7.5% per year. This return was higher than the US or UK markets. In fact, it was the highest of any of the 16 world markets for which useful 100 year data has been collected.

Despite these impressive numbers, however, our market has seen heavy falls, lengthy periods of poor performance, and plenty of company collapses.

There are risks involved, which investors need to make themselves aware of.

If you are willing to accept the risks, however, you can benefit from understanding the business that you are investing in.

For example, you may wish to do some research on the industry in which the company operates, whether or not the company owns a well respected and strong brand name, or whether the company produces quality goods and/or services.

Some of this information will be self –evident. For example, nearly everyone knows of Australian mining monolith BHP, and that the company is one of the biggest mining companies in the world. Many would also know of supermarket chain Woolworths, a big player in the consumer staples sector of our market.

Other information may be harder to find, and this is where websites such as this can help people who want to invest in shares.

In any event, investing in shares can be a very rewarding experience. There is significant benefit in investing wisely and watching your investment grow, in terms of both monetary and intellectual reward.