Stock markets can be scary places for anyone new to investing: a mass of numbers, flashing screens and impenetrable jargon. A far cry from dropping coins into a piggy bank, or paying cash into a savings account.
If you’re saving for the future – let’s say, five years away at the very minimum – investing in the stock market has the potential to produce greater rewards than cash deposits. And it can also head off the corrosive effect of rising prices.
Here’s a run-through of investing basics, plus a look at the ways beginners can buy stocks and shares.
Note: before you consider going down the investing route, it’s sensible to build up a ‘rainy day’ cash fund worth at least three (and preferably six) months of your usual outgoings and to seek independent financial advice with regards to your individual situation.
What is investing?
It’s worth starting with a definition of what investing is, and why people do it. Investing is the process of using your money to generate a profitable return (although it should be noted that investing carries with it the risk of loss, except where holdings are kept as cash).
The investing process involves putting your money into a range of investments.
What are these ‘investments’?
There are four main types, which you’ll hear referred to as ‘asset classes’. They include:
- cash – savings that you build up in a bank or building society account
- bonds – also known as ‘fixed-interest securities’. A bond is an IOU that pays its holder regular payments interest in exchange for a loan to the bond issuer and may be provided by companies or the Federal Government. Australian Government Bonds are known as AGBs, and are touted as a fairly safe bet.
- property – an investment in bricks and mortar, either in the hope that a building’s value will rise, or that you’ll benefit from its rental income and tax breaks, such as negative gearing (sometimes both).
- stocks and shares – these are interchangeable…