The concept of investing is actually pretty simple—it’s when you try to turn some money you have today, into more money in the future.
But for some of us, that is still a tonne of gibberish. Where does our money go when we invest? How does it get used? What kind of impact do our investment choices have and why should we care? Along with the question we’re scared to ask, “where do we start?”
Panic not friends, we chatted with investment platform Sharesies, who revealed the five must-know investing terms that’ll not only give you a new dinner table topic to impress your friends with, but also some tricks to get started. It might just be as rewarding as a morning hazelnut FW from Crave.
Alright, first things first—what is a share?
When companies want more capital, they have two main options: they can borrow money (for example, from a bank), or they can sell shares in the company. When they create shares, they’re essentially creating little ownership pieces in the company. Put simply, if a company has 1,000 shares in total, and you own one of them, then you own 1/1000th of that company.
Companies can either issue shares privately, to specific people or organisations, or they can go public, which means anyone can buy and sell their shares.
Sharesies comes into play as an investing platform where you yourself can invest as little as 1 cent in NZX-listed companies, NZX-listed exchange-traded funds, or managed funds—and they’re also making US shares available on the platform in the very near future. This allows you to really live and breathe the definition of ‘try before you buy’. Remember, you don’t need millions of dollars or a financial degree to be an investor. It really is about starting small and learning, then building that confidence as you go.
Now, let’s get into the lingo bingo!
Risk
All investing has risk. As a general rule of thumb, higher risk means more reward. Some investments pay off more in the long run, but they go up and down a lot more in the meantime. Others grow slowly, but don’t go down in value as often.
Time Horizon
A ‘time horizon’ is just a fancy word for a time frame. It’s the amount of time you expect to invest before you decide to use your money. In general, the longer your horizon, the more risk you can take. And the more risk you take, the higher you should expect your returns to be. Who knew it could be so simple?
A side note: Before you invest, make sure you keep about 3–6 months of rainy day money set aside in an easy-to-access savings account.
Dollar-Cost Averaging
The share market can be a bit of a rollercoaster sometimes, so when you see share prices take a dip, should you panic? Nope! With a well-diversified portfolio, often a fall in prices (also known as a share market correction) can be an opportunity to shop at Karen Walker and pay Warehouse prices.
Be Cool, Calm And Collected
Because, dollar-cost averaging is when you choose to invest a certain amount into a particular investment regularly, regardless of what the price is. It aims to average out the amount you spend on shares over time, rather than trying to catch the market at a specific high or low point.
Averaging-in can be a really handy way to avoid the ups and downs of financial markets and is a technique every investor should consider using. Auto-investing through Sharesies is a really simple way to put dollar-cost averaging into practice.
This means you can make regular purchases of small amounts whenever you like and start getting some runs on the board, rather than having to save up until you have larger amounts to invest.
Diversification
Diversification is when you spread your money across lots of different investments, so you take less of a hit if one of those investments loses value. It’s like the old cliche, “don’t put all your eggs in one basket”.
Just like a shape has length, width, and depth, your investments can have different dimensions as well. Here are a few key ones to get you thinking:
The number of things you invest in: e.g. lots of investments, one investment, or somewhere in between.
Geography: e.g. investing some of your money in companies in New Zealand, and some of your money in companies overseas.
Sector: a group of companies in the same general area (e.g. the mining sector). By investing your money in different sectors, you’re reducing the risk of big changes in one specific sector (e.g. the price of minerals goes down and the mining sector takes a hit).
The kind of investment, also known as asset class: e.g. shares, bonds, cash deposits.
The trick is to look at your investments and ask yourself how each one would respond to the same event. What would happen to your portfolio if the NZ economy had some problems? Or if another wave of COVID-19 hit? Or if oil went up in price? Or if there was a global share price decline? And so on, and so forth. Think of some big picture scenarios, and ask yourself how they’d affect your investments.
Then, if things are looking unbalanced, take some steps to balance things out. That’s how you can use the different dimensions of diversification to make your investing even more valuable, and put you in a better position in the future.
The Future You Want
Every time you buy a share, you’re sending a message. You’re saying that not only do you expect this investment to be worth more in the future, you also want it to be worth more in the future. You’re saying that you want the underlying company to be able to raise money, invest in new equipment, and grow. Companies with more capital can normally grow faster than companies with less capital. Maybe you like wearing your sustainability hat and look to invest in companies that front that as their mission and vision. Do your background research before you place your dollars.
OK, Now For The Legal Bit..
If you take anything away from today, it’s that investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. But remember, it’s all part of the experience of educating yourself. With a platform like Sharesies, you can jump in and learn as you go, then really grow into the investor you want to be.
The goal is to continue devoting to that Sunday almond croissant from La Cigale markets and in the same way, committing towards your own share portfolio. Perhaps one day you’ll use your investments and become the owner of the best croissant joint in town?
Disclaimer: Sharesies don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written.
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Image credit: Brooke Cagle, Logan Weaver
