Investment Shares

Despite many Kiwis being burnt badly in the share market crash of 1987, recent years have seen faith restored as the stockmarket has performed well. In this article, we take you through the basics of New Zealand investment shares and the sharemarket, how to invest in the share market and what options are available.

What is a share?

A share represents a piece of ownership in a company. Businesses offer shares to the public chiefly to raise funds for expansion. When you buy shares in a company, you become part owner of that company and have a say in how the company is run. In theory, each share gives you one vote at the company's annual meeting; however in reality, individual private shareholders will have little influence unless they own a large percentage of the company's shares.

Why invest in shares in New Zealand?

Well to put it simply, people buy shares to make money. There are two sources of income from investing in shares: dividend income and capital growth.

• Dividend income: this is where a company pays out a percentage of its profits to shareholders in the form of a dividend, normally paid out twice a year. Dividend payouts on the NZ share market are some of the highest worldwide. It is important to note that some companies do not pay dividends as they prefer to reinvest their profits in order to achieve growth in the business.
• Capital growth: capital growth comes from an increase in share price. Share prices may rise (and fall) for a myriad of reasons, but the primary reason for growth is that the outlook for the company's future profitability is improving. If a company is growing and increasing its profits over time, invariably the share price will increase and you will see a good return on your investment.

How to make a share investment in New Zealand

Buying or selling shares in New Zealand must be done through a member of the New Zealand Stock Exchange (NZX). A New Zealand stock broker acts as the link between the share market and the investor, and can be called upon to provide information and advice on investing in shares. NZ stock brokers charge a commission for their services, which varies according to the level of service provided. Brokerage charged for a no frills online trade will be lower than for a full service personalised stockbroker.

Another way to make a share market investment in New Zealand is indirectly, through the use of a fund or trust, in which funds are pooled and invested in many companies on behalf of yourself and other investors. These funds can be a good way of entering the NZ share market as they offer the opportunity to diversify with relatively low capital, as well as the shares being selected by an expert fund manager. Fund managers charge a fee for their services.

Long term or short term trading
Short term investment in shares involves buying a stock with the intention of selling at a higher price within a short time frame. This carries a relatively high level of risk and can be tough on an investor's emotional stability. Keys to being successful in this form of trading are:

• Research into stocks
• Keeping a close eye on their movements and shifts in the market
• Learning to recognise the signals that it is a good time to sell

It is important to stick to a plan and to realise that occasionally making a loss on a share trade is part of short term investing.

Long term investment in shares is the most widespread and recommended form of share investment in New Zealand. Long term share investors must thoroughly research and analyse the companies they intend to invest in before taking the plunge. The desired outcome is that the share price rises over the long term. Two main factors are studied in order to assess whether a company is a good buy for long term share investment:

• Growth shares: an investor may be looking to buy shares in a company that is growing measurably faster than others. It is assumed that growth in earnings will approximate to growth in the share price; several formulae are available to analyse this. The strategy of investing in growth shares has been used successfully by many investors over the years, however it is necessary to note that growth stocks are notoriously volatile.
• Value shares: an investor may look to buy shares that are considered undervalued, by analysing a few key ratios. This form of investing is usually done with companies that have a solid earnings and performance history. Generally investing in value stocks is a good idea when the market is down or performing weakly.

Looking for more information? Find New Zealand investment shares in the NZS.com directory.

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Business images from Flickr: Sky Tower, New Zealand Flag and Wellington Buildings.