For realz. But I’ll get to that.
First up though, why are we talking about shares? Because they can be a solid way to build wealth. And they can be another option if you are priced out of the property market.
However, the stockmarket has been given a bit of a bad rap over the years. Partly because of the dudes who run it. People think they’re like this:
Well, I work with a lot of them and can assure you most of them are way more nerdy. They’re much more likely to ‘slave over a spreadsheet’ than ‘snort coke off a hooker’.
And maybe you think people who play the stockmarket are super-rich, like Goldie Hawn in Overboard (oh, what an 80’s classic!):
Well, go down to any company AGM (a shareholder meeting) and check out the crowd.
There are two types of shareholders. The first is mainly white guys in suits (‘institutional investors’). They invest on behalf of super funds and the like, and don’t go to AGMs because they have private meetings with CEOs in boardrooms with tiny bottles of San Pelegrino.
The other shareholders (‘retail investors’) are normal people like us. A fair few are older people who come to AGMs for the free sandwiches – and because they rely on shares for retirement income.
“But enough random photos, tell us more about shares!” I hear you say. Well, as R. Kelly once said, let me break it down for ya.
“Stocks, shares, equities: what are they?”
These are all the same thing and they mean you have bought a piece of a company. You are a part-owner of it. You share the risk and the reward. If the value of the company increases, the share price goes up. If it makes a profit, it gives some of it to you. If it goes bust, so does your money.
Types of shares:
Bluechip – this is not an actual technical term. It’s just a way that people refer to big, reliable companies like banks or miners. (Note: being big isn’t a guarantee of reliability. It’s like, you can buy a pair of Jimmy Choo’s and be confident in their quality – but that stiletto heel can still get caught in a crack and snap off.)
These shares are the premium end of the market – you’ll pay more for them, because they are less risky. Buying bluechips is like marrying a guy in his 40s who already has a house and a career . He has done the hard yards and proven he is an adult. But you pay a price – emotional baggage and a bitchy ex-wife.
Bluechips also tend to pay more in dividends but have less capital growth – explained below.
Large cap, small cap – This is short for ‘large capitalisation’, and is the sharemarket value of the company. Each share is worth a certain amount, and there are a certain number of shares out there. When you multiply these, it gives you the ‘market cap’. (Company A has 1000 shares each valued at $1, so its market cap is $1000.) There are also ‘small cap’ and ‘micro cap’ stocks, which are often bought based on their growth potential rather than how they are doing now.
A company’s ‘market cap’ hopefully grows over time, as its profit, size and share price increase. It’s possible to buy a ‘small cap’ stock that becomes a ‘large cap’ years later. This is like marrying a 28-year-old guy working on a start-up – a decade later you might be living in a waterfront mansion, or struggling to pay for childcare because you’ve become the breadwinner. It’s a bet on the future.
Bottom line: A good share portfolio will often have a mix of large and small companies because they each have their pros and cons.
“Ok, got it. But what will shares actually give me?”
Because you are an owner of the company, management might decide to give you a share of the profits. These are dividends. Management decides how much they will pay each year, once they have run all the numbers.
This is what those retirees at the AGM are looking for, as dividends replace their pay cheques. However, the company might not make a profit. Or it needs to invest the profit into paying off debts. So they don’t pay you anything.
That’s because dividends are ‘discretionary’. A company never has to pay them.
You can choose companies that are really bloody likely to pay them, like a big bank. Overall though, income from shares tends to go up and down, so if you rely on them for your lifestyle, you generally need other assets like fixed-income bonds or term deposits as well.
2) Capital Growth
This is where the big gains can be made. If you had bought shares in Apple back in 1980 – when Steve Jobs was just another nerd in a turtleneck – you would have paid fifty cents each. They are now $110 each. Even allowing for inflation (i.e. things used to cost less – remember when a mixed bag of lollies was 20 cents?), that is still a damn good deal.
Of course, for every Apple there’s another five companies that either fell over, stumbled along or just ran a steady marathon. It’s all about picking the right stocks. Is that 28 year old boyfriend going to make good money, be a caring father, not get a beer gut and stay faithful?
Nobody knows. Even Beyonce. She won on the first three but failed on the last one. That’s exactly the same as picking stocks. The good thing is, you can have as many stocks as you like, whereas society says we can only pick one husband at a time. (Whatevs).
Total shareholder return (TSR) is what you get when you add these together. Often you can choose to keep reinvesting the dividends you get paid (if you don’t want the income), so that boosts your shareholding value. Couple that with capital growth, and that’s your return.
The TSR is based on many factors, including the company’s performance and share price. For example, ANZ Bank has delivered 7.5% TSR on average over the last eight years, while Westpac has delivered 11.5%. Luck, skill and research, basically.
“Shares sound great! Sign me up! Take my money!”
Whoa there sister. Let’s just bear in mind a couple of things about shares.
They are volatile (compared to cash, bonds or property). Their price can go up and down in one day (and usually does). A bit of ‘vol’ (as we like to call it, because we sound cool and smart) is okay over the long-run, but it does mean you need to be flexible. If you want to spend the $5000 in your share portfolio, you can easily sell them. But is the price good that day, week or month? This is why shares are better over at least a five-year time horizon.
All shares are not created equal. Some are dogs. For example, if you bought Myer shares in 2009 for about $3.60 they’d be worth less than 50 cents now (as at 5/1/19). I suspect these shares were bought by men who hate shopping, because if any of them had set foot in a Myer they would know the service is shit, the stores are tired and the prices are ‘meh’.
But if you had bought JB HiFi at the same time, for $9.50, you’d be smug AF now, because they are currently $38 each (as at 5/1/19). Although, why people still buy all those CDs and DVDs baffles me . (By the way, if you like these figures, the ASX website has heaps of fun graphs and charts)
So, you can choose your own shares or you can let someone else do it. But even the pros get it wrong sometimes. What we hope is that they get it right more often. Which brings me to the third point.
Don’t put all your eggs in one basket. This is good old ‘diversification’. As we have discussed before, that’s just a fancy way of saying don’t stock your wardrobe full of just ballet flats, or just high-heels, or just runners. That’s crazy. Same with investments. If you buy shares, buy a range of them, because they will all perform differently over time, and in different conditions.
But how do I buy a whole bunch of different shares with just $1000?
Glad you asked! You can either buy a managed fund or an exchange-traded-fund (ETF). They pool a lot of people’s money and spread it out over a range of shares. (You can click the links to find out more about them).
I won’t give you advice on which ones to choose but I can tell you that I have the Raiz app. This takes small amounts of money out of my bank account every week and puts it into an ETF. It’s pretty cool because you don’t notice the money going out.
I don’t fancy myself as a stockpicker. Firstly, I just finished that subject in my post-grad course, and it was seriously the hardest fucking thing I ever studied. Secondly, I don’t have time to dig into the company accounts of potential investments.
So I put share investments into my mental list of “things better left to experts” (along with tax returns, powerlifting training programs and making laksa).
If you do want to go it alone, you can easily sign up to a broker and do it yourself. Check them out at Canstar (a comparison site).
“Sheesh, that’s so much information, I am just as confused as ever”.
Ok I hear ya. There is a lot to know. You can always talk to a financial adviser. Or you can just start small. For example, download Raiz. Or pop $500 into a managed fund or ETF. Or have a ‘fantasy portfolio’: pick some stocks and watch them over a period of time to see how you do.
What I would say is this: if you haven’t bought a property, (or even if you have), shares are one more option for you to build wealth and become a certified Fierce Girl.
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