Returns from shares
We can make money from shares through capital gains, where we sell a share for more than we paid for it, and from earning income called dividends.
Like house prices, share prices are generally expected to go up over time and give us a capital gain on our money when we sell. However, shares can also lose value if the price falls below the price we paid for them. We only make a loss or a gain when we sell the shares.
Overall the long-term trend is for the value of shares to increase at a rate higher than inflation.
When the company makes money, we're sometimes paid a share of the profit, called a dividend. We can choose to receive this dividend in cash, or reinvest it to buy more shares in the company.
The risks that come with buying shares
Risk is the potential of losing some or all of our money. There are two main types of risk with shares – volatility risk and absolute risk.
Sudden rises and falls in the price of a share is called volatility and some companies have a higher risk of this than others. Changes in a company's profitability and in the economy as a whole can cause share prices to rise and fall. Although prices might fall, we haven't lost any money through volatility unless we actually sell our shares.
Absolute risk is the risk of losing our money because the company fails and our shares become worthless.
Sound scary? Everyone has a different tolerance for risk – the investor kickstarter can help when it comes to choosing the right types of investment.
How to spread that risk
Tip: Investing in a range of different companies and industries here and overseas helps spread the risk of one of them falling over.
It's generally not a good idea to put all our money into a small number of, or very similar, investments. It's better to spread investments in shares across different companies, industries and countries, as well as buying other asset classes such as bank deposits, bonds, and property. This is called diversification.
The investor kickstarter can help find a mix of investments that works for us.
Buying and selling shares
Shares are mostly bought and sold on stock exchanges such as the NZX. Shares can also be called stocks, equities, or securities.
We can buy or sell shares through a sharebroker. Some banks offer a sharebroking service – check their website for details.
There's more on the Financial Markets Authority website about what to check before investing, including the financial and disclosure information.
Another way to buy shares is in a managed fund, which can be bought directly from a fund manager.
Guide to managed funds
Many KiwiSaver investment funds also have shares as part of their investment mix.
Shares listed on stock exchanges and managed funds are usually easier to buy and sell than unlisted shares.
If we own shares we may be asked by the company to buy more of its shares (for example in a rights issue or some other allotment of new shares, when the company is seeking more capital) or we may be asked by the company to sell some of our shares back to it (if the company does a share buyback). We also might be asked to vote about whether other shareholders can increase their level of ownership in the company. For almost all listed shares and for some unlisted shares, these transactions may be regulated by the Takeovers Code, which has some protections for shareholders.
