The Future of Investing

Why Invest in Shares?

Although there are many options available in which to invest your money, few of them offer the same security and likelihood of consistent profits than the share market. However, other investment options do offer some advantages over shares.

Fixed interest offers security. Cash offers liquidity. Property investors can directly increase the value of their investment by renovating, extending or even knocking down the property and rebuilding. It is also easier to borrow money against a property than it is against shares. Overall though, there are many reasons for shares to be considered above other options.

First, and most importantly, over medium to long-term periods, shares invariably return higher overall returns than most other forms of investment. The table below shows shares outperforming the other types of investments over a ten-year period.

Report compiled by Towers Perrin for the Australian Stock Exchange in September, 2001

This result is not confined to this particular period. Throughout this century, shares have returned greater profits, more consistently, than the other forms of investment. These returns can be delivered in one of any four ways: the initial dividend yield, increasing dividends, tax benefits and increased share value.

1. Initial dividend yields
   The initial dividend yield is the share of its profits that a company pays to its shareholders. This dividend is generally paid every six months. Not all of the company’s profits are paid in dividends. A company’s board of directors will usually decide how much of the profit should be distributed back to the shareholders and how much should be ploughed back into the business to further increase the company’s worth. In some cases, the board may decide to re-invest the entire profit.
      
2. Increasing dividends
   Increasing dividends are paid out by well-performing companies that experience an annual increase in profits over a number of years. They are in a position to be able to increase their dividend payout so that it consistently keeps pace with or outstrips inflation.
      
3. Tax benefits
   Tax benefits from shareholdings are available because many companies pay tax on their profits, meaning investors receive tax credits on the dividends they receive. Often, shareholders pay little or no tax on the dividends they receive.
      
4. Increased share value
   Increased share value occurs as the value of individual shares increases, resulting in an overall increase in an investor’s portfolio. However, the increased share value only has a paper worth unless the shareholder decides to sell some or all of the stock.

Apart from their consistent performance, there are other reasons why shares are an attractive investment option. They are a liquid investment. That is, they can be bought and sold as required. Selling a property can take months. Selling a share can take seconds. Shareholders can choose to divest themselves of just a portion of their holdings in a particular company, or they can sell the lot. Such an option is not available with property.

Another advantage is that the true value of a share investment can easily be ascertained. It is as simple as looking up the daily share market results in the newspaper or on your computer. If only it was that easy to value a property.

Creating a share portfolio enables you to invest in a number of industry sectors. By investing in companies operating in different industry sectors, you minimise losses from one badly performing sector. As one sector suffers a downturn, another may be experiencing growth. This is one of the major reasons that a well-balanced share portfolio invariably outperforms many other types of investments.

Next: What is the Stock Market?