Now that you know why you're investing and how to get started, it's time to dig deeper and pick some investments.
As you may have noticed, there are several categories of investments, and many of those categories have thousands of choices within them. So finding the right ones for you isn't a trivial matter.
The single greatest factor, by far, in growing your long-term wealth is the rate of return you get on your investment. There are times, though, when you may need to park your money someplace for a short time, even though you won't get great returns.
Here is a summary of the most common short-term savings vehicles:
Short-term savings vehicles
Savings account: Often the first banking product people use, savings accounts earn a small amount in interest, so they're a little better than that dusty piggy bank on the dresser.
Term Deposits: Generally available from most banks, term deposits lock your money away for a set period, at a set interest rate. Usually, the longer the period, the better the interest rate.
Cash Management Trusts: these were popular in the late 1980s and 1990s, but these days high interest savings accounts effectively do the same thing, but pay you higher rates of interest. If you still have one of these dinosaurs, close it down and transfer the cash to a savings account.
Fools are partial to investing in shares, as opposed to other long-term investing vehicles, because shares have historically offered the highest return on our money. Here are the most common long-term investing vehicles:
Long-term investing vehicles
Shares: Shares are a way for individuals to own parts of businesses. A share represents a proportional share of ownership in a company. As the value of the company changes, the value of the share in that company rises and falls.
Managed funds: Managed funds are a way for investors to pool their money to buy shares, bonds, or anything else the fund manager decides is worthwhile. Instead of managing your money yourself, you turn over the responsibility of managing that money to a professional. Unfortunately, the vast majority of such "professionals" tend to underperform the market indexes.
Superannuation is money set aside over your lifetime to provide for your retirement. For most people, super begins when they start work and their employer starts paying super for them – these payments are known as super guarantee contributions or concessional contributions.
Super funds invest your money in many things, such as shares, property and managed funds. Complying super funds receive more favourable tax treatment than individuals and companies.
By 2025, all Australian workers wishing to access their superannuation would be at least 60 years old.
Investing in shares
It's worth taking a closer look at shares, because historically, they've had much better returns than other investments. Essentially, buying shares lets you own a part of a business.
Dating back to the Dutch mutual stock corporations of the 16th century, the modern share market exists as a way for entrepreneurs to finance businesses using money collected from investors. In return for ponying up the dough to finance the company, the investor becomes a part-owner of the company. That ownership is represented by shares — specialised financial "securities," or financial instruments — that are "secured" by a claim on the assets and profits of a company.
Common shares are aptly named — it's the most common form of shares an investor will encounter. This is an ideal investment vehicle for individuals, because anyone can take part; there are absolutely no restrictions on who can purchase common shares — the young, the old, the savvy, the reckless.
Common shares are more than just a piece of paper; they represent a proportional share of ownership in a company — a stake in a real, living, breathing business. By owning shares — the most amazing wealth-creation vehicle ever conceived (except for inheriting money from a relative you've never heard of) — you are a part-owner of a business.
Shareholders "own" a part of the assets of the company and part of the stream of cash those assets generate. As the company acquires more assets and the stream of cash it generates gets larger, the value of the business increases. This increase in the value of the business is what drives up the value of the shares in that business.
Because they own a part of the business, shareholders get a vote to elect the board of directors. The board is a group of individuals who oversee major decisions the company makes. They tend to wield a lot of power in corporate Australia.
Boards decide whether a company will invest in itself, buy other companies, pay a dividend, or repurchase its own shares. Top company management will give some advice, but the board makes the final decision. The board even has the power to hire and fire those managers.
As with most things in life, the potential reward from owning shares in a growing business has some possible pitfalls. Shareholders also get a full share of the risk inherent in operating the business. If things go bad, their shares of stock may decrease in value. They could even end up being worthless if the company goes bankrupt.
We hope this hasn't been the most painful thing you've had to read this week. You're now conversant enough in share market matters to impress those who are very easily impressed.
Although knowing the terms and general workings of the share market is just the first step in your investing career, it's useful to know that each share represents a proportional share of a business, and that the potential rewards are great, but that shares are also riskier than putting money in the bank.
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