If you are new to the investment world or just need a refresher, you're in the right place. We'll take you through the basics of how share investing works.
Key takeaways
Investing in shares offers potential for higher returns compared to savings accounts, catering to both short-term goals like a dream holiday and long-term aspirations like buying a house.
Investors profit through dividends and capital gains. Dividends provide small, regular cash payments, while capital gains are selling shares at a profit.
Share prices fluctuate based on supply and demand, market news, company performance, and investor psychology.
Why invest in the share market?
People dive into the share market usually in the hopes of making some money. Although savings accounts generally offer low risk returns, historically the share market has outperformed the interest you earn from a savings account.
Everyone’s reason for investing is different and there are a range of options open to you. You should be clear on what your goals and objectives are before you jump in.
Here are some reasons why people may invest in the share market:
Short and medium term goals: A dream holiday or a new car can be expensive. Investing can allow you to grow your wealth and help you meet that short and medium term goal.
Long-term goals: Think big and think ahead. Whilst the market could have plenty of ups and downs, in the long run, and with some smart buying and selling picks, you could set yourself up for a stable financial future. Depending on your life stage, this could be a comfortable retirement or a house deposit.
Extra cash flow: Some investments aren't just about growing your money. They can also provide a passive income. With regular dividends – which are a portion of a company's profits, you can use this extra cash to expand your investments or withdraw it as disposable income.
How do investors make money from shares?
Dividends
When you own shares in a company, you become a partial owner. Some but not all companies share their profits with shareholders through dividends. You might decide to reinvest your dividends to buy more shares or withdraw them as disposable income.
Capital gains
When you sell your shares at a higher price than what you bought them for, you make a profit which is commonly referred to as a capital gain. For instance, buying shares at $10 each and selling them at $15 realises a $5 capital gain per share.
Understanding dividends
Dividends are essentially your ‘bonus’ for being a shareholder in a company. When a company earns profits, it might decide to share a portion of those earnings with you and other shareholders. The way dividends work is quite simple:
Dividends are valuable for investors who want a steady passive income from their investments. However, not all companies hand out dividends. Some instead choose to reinvest their profits into the company for growth, while others may pay irregularly or not at all. So, while dividends can be a reliable income stream for investors, you’ll need to do your due diligence before investing.
Why do share prices rise and fall?
Ever wondered why share prices seem to go up and down? Let's break it down. There can be many reasons why a share price moves however here are the two main drivers.
Market News and Company Performance
Share prices are influenced by what's happening in the world and how well a company is doing. Positive news about a company, like a new product or strong earnings, often pushes prices higher. On the other hand, negative news or poor performance might lead to a drop. It's like the stock market's way of responding to the latest scoop about a company. The Market Analyst team at CMC Invest help keep you updated on the latest market news.
Market Psychology and Trends
Share prices can be a bit like a popularity contest. Investor emotions play a big role. If many investors are excited about a stock, its price can rise. On the other hand, if people get worried, prices might fall. Understanding trends in price movements can be tricky however, they can be an effective way to make a capital gain.
How to buy shares
Buying shares and getting started is easier than you think. While it differs between platforms, there are only a few basic steps:
Account set-up: Open an account with a reputable and user-friendly platform like CMC Invest. It will only take you a few minutes and we'll get the verification underway. Once you’ve provided the necessary personal details and made a deposit into your account, you're ready to start!
Research: Before diving in, research any potential investments you are considering. Analyse different companies, review their financial reports and consider whether they are a solid long-term prospect. Good research will help you make informed choices based on actual market data.
Making the purchase: Once you’ve done your research, it's time to buy some shares. Using your account, place a ‘buy order’ for the number of shares you want. Confirm the purchase, and voila – you're officially a shareholder in that company!