So you want to buy shares ...

Press, 4 August 1981, Page 12

So you want to buy shares ...

Diana Shand

M.B.A.(McGIII)

On July 15 “The Press" printed its 1981 Financial Review which covered, among other things, shares and investment terms — an excellent explanation for those interested in this form of investment!

Now we all understand the workings of the sharemarket, and I can simply pass on a few hints before we saunter down to the stock exchange to pick up a share parcel and chat about this and that and preference shares. Ho hum! Well, actually; it’s not that easy. If this is how you choose to make money with your money, you should understand what shares are

and how the market works, and decide whether you or someone else will spend time guarding this investment. If it is to be you, you had best be guided by time-estab-lished rules until you gain the knowledge needed for success. Find a good sharebroker

and follow his advice - , or prepare to watch your own chickens. With blue chip’dr gilt-edged stock you are generally buying reliable per-

formance and average profits. But with speculative shares, high returns are a hope, not a promise. These riskier propositions should be watched constantly.

Before committing your money, you must weigh up whether you prefer (or can afford) short-term or longterm investment, safety or greater profit, income or capital growth. Remember that as a rule greater profits go hand in hand with greater risk.

You can lend money to a business by .way of debentures, getting 'a stated jnten est or return and your money back at the end of the agreed-on term. With shares you are buying a* share in the

ownership and so in the profits and losses. Your loss is limited to the amount you have paid for your shares — if the company is registered as a limited (liability) company.

There are two returns you can obtain from investing in shares. Income in the form of dividends gives you a return bn your money — but the amount is not necessarily fixed. With preference shares the dividend is fixed, but not so ordinary shares. This means that ordinary shareholders can get larger dividends in years when their company is profitable and less or'none in bad years. Capital growth occurs when the price of the share rises — so you may sell it for

more than you paid for it. This means that you make a capital gain — which is not taxable. Dividends are taxable unless the profits being distributed come from reserves not subject to taxation. .These are unpredictable.

Some people confuse dividends and yields. The dividend you receive can be seen as a return on your money. But the dividend percentage is worked out on the face value of the share — not what you paid for that share, nor the current market value. Use this formula to calculate your return: face value divided by market value (what you paid), multi-

plied by the percentage dividend equals your percentage yield. Obviously a good rule is to buy shares at a price that shows a satisfactory yield. But that, of course, assumes that you are into the sharemarket for income — and I acknowledge that some people are in for capital growth only. A guiding principle is to spread your investments and avoid too many eggs in one basket. Rumours can play havoc with a stock market and hot tips with your portfolio. So don’t sell-up on the scare news, and treat investment tips with care. Some people see their

share value tall and buy more as the price goes down. This could mean you end up with a lot of unsaleable shares - be careful. Ideally you buy shares before or as their price rises — but with lack of skill and knowledge one could buy just when the price stops rising or slackens.

The necessary skill and knowledge are not easily acquired. External market factors have to be weighed against market trends and industry performance. And an individual firm then has to be considered on its past record and management plans. I advise getting good advice and watching your own portfolio’s performance before taking it over. If you want to rush in on gut feel and hot tips, you can just as fruitfully duck down to the T.A.B. as order your gambles through your sharebroker.