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Are shares a better bet than savings?

Posted on | September 13, 2013 | 4 Comments

With the recent further slump in savings interest rates, you can’t rely on a savings account to make you a decent profit. Increasingly, investors are choosing to invest in the stock market in an attempt to get a better return on their money. Shares are traditionally seen as a high risk investment but there is a huge variety of shares available and they all have different risk profiles. If you are considering investing in shares then the following tips will help you to get started.

What is your risk tolerance?

The first step for any budding investor is to work out the right amount of risk to take on. Risk tolerance is a very personal thing and you will need to take the following factors into account:

  • Income (in particular your expendable income). The more free income you have, the more you can afford to invest. You should never invest more than you can afford to lose – remember even low risk investments can lose you all of your capital and interest. Click here to see the software used by the professionals to manage risk.
  • Age – or proximity to retirement. Generally speaking it is considered wise to invest more aggressively (higher risk investments) when you are younger. As you approach retirement, your investment strategy should be increasingly conservative (predominantly lower risk investments).

What are shares?

Stocks and shares are financial instruments which, once purchased, mean that you own part of the company in proportion to your shareholding. Owning shares does not mean that you will have control over the running of the business but you will have a right to a share of the profits (if any) made by the company.

This share of the company’s profits is called a dividend and the amount to be paid is decided by the board of directors. Most well-established companies will pay a dividend which means that you will see some return on your investment even if the share prices aren’t great. The dividend will normally be quoted as the dollar amount to be received per share held.

There are 2 main types of shares:

  • Common shares – these are the ordinary shares that most people buy when they invest in a company. A common shareholder will have the right to receive      dividends and also vote on some corporate issues.
  • Preferred shares – If the company pays out dividends or liquidates then holders of preferred shares will receive payments as a priority over common shareholders.

How risky are shares?

When you buy shares, you are buying an actual slice of a company. For this reason, the risks attaching to particular shares are as varied as the companies themselves. It is unrealistic to expect an immediate return from your shares and your investment should be for the long-term. Professional asset managers use software such as that provided by www.Sungard.com/APT/ to manage their investment risk.

If you are looking for a lower risk investment then you should choose to buy shares in well-established companies with a proven track record. Generally speaking, good companies make better profits. Even professional investors sometimes suffer massive losses on the stock market as the recent cases of Northern Rock and Enron have shown. However, it is quite rare for big companies to go bust. Their share prices may fall in the short-term but they will normally rise again given time. The most difficult decision for you will be whether to cut your losses and sell or wait for the share price to increase again and hopefully turn a profit.

If you would like to make some higher risk investments (and hopefully a greater return) then you may want to consider purchasing shares in some of the following:

  • Invest in less well-known companies including start-ups or less well-established businesses. This is more risky but will provide a greater return on your investment if the company is successful. You should note that whilst the potential return is greater, the chances of actually receiving that return are lower.
  • Invest in businesses abroad. The location of a business always affects the risk attaching to that company’s shares. In the worst case scenario, as we have recently seen in Greece, the value of a whole country’s financial instruments can be devastated.
  • Invest in a higher risk industry. Technology companies are considered to be a much riskier investment than buying shares in other more well-established companies.

Do you have any shares in your investment portfolio? What shares will you buy?