Risks & Benefits

Shares can be a sound long-term investment but of course there are always risks to be considered as with any type of investment.

Risks

Volatility

Share values can be volatile and can fall dramatically in price, even to zero.

Credit risk

Owners of ordinary shares are generally the last in the line of creditors if a company fails and there may be no chance of getting any money back.

Sleep at night factor

While daily fluctuations in price are to be expected, investors can often feel a degree of stress from short term volatility and bear market conditions.

Unexpected events

Unexpected events which are outside of your control, such as company specific bad news, a change in government policy or natural or man-made disaster can seriously affect share prices.

Lack of knowledge

Your lack of knowledge as a new investor may be considered a risk initially.

 

Warning

Investing without knowlege and understanding is just speculation and relies on luck.

The good news is that there is a lot of good information available, including this site and other courses offered by the AIA and with time and commitment you can learn and manage your own portfolio

 

There are also a number of benefits that can come from investing in shares.

Benefits

Ease of trading

Whether you use a full service broker or do it yourself, making an investment in your chosen stock is as easy as a phone call or a click of a mouse.

Flexibility

You can choose to invest as little or as much capital as you want in shares and spread that capital across sectors and if you decide you’ve got it wrong you can change your strategy easily as you are not locked in for a fixed term, nor will you suffer any penalties for exiting, other than normal buy/sell costs.

Capital growth

The value of shares can grow over time.

Passive income

Some shares pay good dividends and these are often accompanied by franking or imputation credits. This income stream is passive and over time can become sufficient to supplement or even replace working income.

Taxation

You can take advantage of the imputation credits, there are lower tax rates on long term capital gains and you can have the benefit of legitimate tax planning by buying shares in the name of a lower income earner.

Low costs

You can buy and sell shares at very low cost in proportion to the investment amount, for example to buy a $10,000 parcel will cost you just $20 with one online broker and there are no ongoing holding costs.

Liquidity

Most shares are liquid assets.  If you need cash for any reason, shares can be sold at short notice.

Rate of return

When you take dividends into account, an investment in shares can provide you with an acceptable rate of return over the long term.

Information

There is so much information available to shareholders to help you monitor and manage your share investments so it is easy for shares to form a key component of an overall investment portfolio.

Personal involvement

Managing a share portfolio can provide you with a level of personal involvement that can be whatever you need or have time for.  For retirees, it can provide an interest to replace paid work when the time comes.