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Investing in the sharemarket: what you need to know
August 2023
Key takeaways
- Long-term investing decreases the impact of market volatility on your investment returns. It can also be a more cost-effective because the longer you hold your investments, the less capital gains tax you have to pay
- Investing in a variety of different classes of shares across many industries, may reduce the impact of loss in your portfolio
- Understanding the relationship between risk and return is critical. Generally, investments that have higher risk tend may have the potential for higher returns-lower risk, lower potential for returns.
With the right approach, investing in the sharemarket can offer a simple way to grow your wealth.
Doing your research, diversifying your portfolio, and investing for the long-term, can help you minimise risk and maximize your potential for return.
In this article we look at strategies to help reduce risk and some things to be aware of.
Investing in the sharemarket: strategies to minimise risk
Investing in shares comes with risk. There is also no guarantee of making a profit. But there are things you can do to reduce your chances of loss.
Diversify your portfolio
Investing in a variety of different classes of shares across many industries, can reduce the impact of loss in your portfolio-when one company is suffering, other investments may be thriving. This approach can therefore help to minimise your risk and increase your chances of earning a return.
Invest for the long-term
Long-term investing can decrease the impact of market volatility on your investment returns-you can ride out some of the highs and lows over a period of many years or even decades to generate better long-term returns.
Keeping your shares in your portfolio longer can also be a more cost-effective because the longer you hold your investments, the less tax you may have to pay-if you hold your shares for more than 12 months, you can claim a 50% discount on your capital gains tax when you sell them. For example, if you sell shares that you've held for longer than 12 months and you make a capital gain of $2,000, you'll only be charged capital gains tax on $1,000.
Know your investment timeframe
We all have different investing goals: retirement, paying for our children's education, saving for a home deposit.
No matter what the goal, the key is to understand your how long you intend to invest for, or when you'll need the money. This will give you a better sense of which investments to choose and how much risk you should take on.
Do your research
Look for companies that have strong financial performance and a proven track record. Quality companies are more likely to perform well in the long run.
And don't forget to remain informed on market news and trends that could impact your investments.
Investing in the sharemarket: ways to make money
There are a number of ways you can earn a return on your investment by investing in the sharemarket.
- Capital gains: when the prices of the shares increase, investors can sell their shares for a profit, generating capital gains
- Dividends: a portion of a company's profit is paid to shareholders, usually once or twice a year. Dividends can then be reinvested to purchase more shares which can increase your overall return
- Buy low, sell high: this involves buying shares in a company when the price is low then selling when the price increases. You need to time the market correctly to achieve this however.
Investing in the sharemarket: considerations
Being aware of these considerations, and other potential pitfalls, can help you make more informed decisions when investing in the sharemarket.
Risk and return
Understanding the relationship between risk and return is critical for investors.
Generally, investments that have higher risk may have the potential for higher returns-generally lower risk, can mean a lower potential for returns.
For example, investing in a new start-up tech company could lead to high returns in comparison to a stable blue-chip company, but it also comes with a lot more risk.
Another thing to think about is how much risk you feel comfortable with, and whether it aligns to your investment goals. If you're young, you may be willing to take on more risk as you have time to ride out the losses than someone who's close to retiring.
Emotion
Some people find it hard to remove emotion when making investment decisions, but this can really cost you in the long-term.
Irrational decisions like selling shares during a market downturn or buying into a company because it's ‘hot', can greatly impact your returns.
Fees and taxes
There are a number of fees associated with investing in shares-brokerage fees, management fees, and transaction fees-to name a few. These fees can eat into your investment returns over time so it's important to choose low-cost investment options wherever possible.
There are also tax implications of investing in shares, including capital gains taxes and tax on dividends.
Market volatility
Share prices can fluctuate significantly in response to economic changes, industry trends and company performance. These fluctuations can often result in short-term losses, even if the long-term outlook for the company is positive.
Company risk
While diversification can help to minimise risk, individual companies can run into problems. This could be due to management or legal issues. As a result, their share price may be affected.
Timing the market
Trying to predict when the market will rise or fall is a risky strategy. Even analysts struggle to time the market correctly so it's important to focus on long-term goals rather than taking a stab in the dark.
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