The prices of individual shares on the share market are subjected to a wide range of factors that can affect the prices. The market and its performance are tracked using a number of measures, known as indexes.

These indexes such as the All Ordinaries – which tracks the top 500 companies listed on the ASX – provide a gauge on how the overall performance of markets, or particular segments – such as the emerging company index (XEC).

The prices on the share market can rise and fall for a wide range of reasons, outlined below:

• Company-specific – such as profit announcements, corporate restructures or new opportunities
• Market-specific – such as the announcement of the government cracking down on sugar in soft drinks and its effect on Coca-Cola Amatil’s (CCA) core market of carbonated soft drinks
• Industry-specific – The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
• Macro-economic - such as the Chinese-US trade war

All of these specific reasons or changes can positively or negatively take their toll on the share price on the share market.

Other factors include demand & supply (how much is available to buy and how many people want to buy a particular share), interest rates (availability to money), election cycles, geopolitical risks, even activism investing, which is often led by large hedge funds in taking a position against a company they see as behaving badly to crush their share price.

Thanks to the introduction of technology, trading shares, which was once facilitated by brokers running all over the place at the ‘trading floor’ of the stock exchange, most transactions are facilitated electronically.

Participants in the stock market range from individuals, known as retail investors, to big institutional investors, such as fund managers, insurance companies, banks and pension funds.

Odds are that if you don’t have any shares but are currently employed in Australia – even if you are employed part-time as a student – you will have a superannuation account. That account is effectively a managed fund, and the way a managed fund works is that all your money is pooled with other peoples and the fund manager buys & sells shares, bonds, currencies, property, invests in other funds all to increase the value of the fund, and your super. Apart from property, most of those transactions are facilitated on share markets – such as the ASX.

Similar to most markets, when an investor (or buyer) finds a share that they would like to purchase, they select a three-letter code – such as VRL for Village Roadshow Limited or ANZ for ANZ Bank – enter the number of shares they want and the price they wish to pay, then place the order.

The trading platforms allow for buyers to either select the price as ‘market price’ in which case the share is simply purchased at the ‘going rate’. Alternatively, the share trading platforms allow you to stipulate a price you are willing to pay per share and waits until that price comes available before activating the trade.

Once the order is placed, and buyers and sellers are matched, the shares are purchased utilising the CHESS system, and money changes hands, while shares are transferred from the sellers account to the buyers’ account.

It is important to note that the amount of shares you want doesn’t need to perfectly match up with an amount another person (buyer) is looking to buy. If you want more or less, the trading systems allow for packages of shares to be split up and disseminated as required between one or multiple buyers in the market.

There are several reasons people invest in the share market, however, the primary reason is to generate wealth. This can be achieved in a number of ways on the share market, through either the potential capital growth of the share price purchased, through dividends paid by the company to each shareholder for each share held as a percentage of the profit generated and sometimes a combination of both.

In Australia, shares can be bought and sold on the Australian Stock Exchange (ASX) through online trading platforms – such as CommSec, IG Markets or CMC Markets Stockbroking – once a CHESS number has been set up with the ASX.

The CHESS number or Clearing Houses Electronic Sub-Register System is part of an integrated system that settles trades made and exchanges the title or legal ownership of those financial products for money. The CHESS transfers the title or legal ownership of the shares while simultaneously facilitating the transfer of money for those shares between participants via their respective banks.[6]

By investing in shares on the ASX you are buying part ownership of an ASX-listed company – usually, minimum investments can start from as little as $500 – you can enjoy and be a part of their performance for your personal gain (or loss).

If the company performs well, as a ‘shareholder’, you can enjoy capital growth of your ‘asset’ in the form of a share price increase, as well as dividends paid out of the profits generated – that is not being reinvested in the company for future growth opportunities.

Meanwhile, if the share price movement is backwards, unfortunately so does your investment. As a ‘part-owner’ of the company, you have to work with the good, bad and sometimes ugly of being a company owner.

[6] https://www.asx.com.au/documents/research/chess_brochure.pdf

Traditional investments are most certainly those which appeal to a more ‘traditional’, ‘risk adverse’ investor base. This is in large part due to their liquidity as previously mentioned. Should the asset class start moving in a way that is beyond the investor’s risk tolerance, or they quite simply need cash, the traditional investments are the safer option.

According to the World Economic Forum, there are three main traditional investment types, these being cash, government & corporate bonds and shares.

Cash

Although not as prevalent as it once was, cash has always been considered king! From a very early age in Australia – and around the world for that matter – school children are taught the importance of money, saving and squirrelling money away in bank accounts for everyday savings, emergencies and of course one day the most expensive asset most people will ever own, a house.

In recent times with the rise of international business, eCommerce and cryptocurrencies, the ‘cash landscape’ has certainly changed.

During times of recession or economic hardship, cash and its ability to purchase goods and services is often diminished, with examples during especially the times of the world wars last century, where people walked in with wheelbarrows of cash to buy loaves of bread!

That being said, cash has the ability to buy goods, services, other investment vehicles as well as accumulate interest – albeit meagre – in bank accounts.

Government and corporate bonds

Government and corporate bonds have for centuries been safe forms of traditional investments.

From the government ‘war bonds’ that were used by nations to fund the efforts of the first and second World War, through to bonds to fund future expansions or financial requirements without diluting shareholder equity.

A bond is “an official paper given by the government or a company to show that you have lent them money that they will pay back to you at a particular interest rate”[4]. As the name suggests, government bonds come from the government of a particular nation usually created to fund infrastructure spending or economic development, which generates revenues which can then fund the payback of the bond with interest.

Australian corporate bonds can typically earn you a return of around 5.2% compared to bank deposits or term deposits returning less than 3.2%[5]. While Australian government bonds can be anywhere from 1.5% to 5.7% depending on their particulars, including but not limited to, their investment period and the time in which they were raised i.e.: recession or financial instability. 

Shares

In broad terms, a share market, like any market, is a place where buyers and sellers are brought together to buy, sell, trade and invest in financial instruments, while also being a place where companies can facilitate the issuance of shares, initial public offerings and raising capital.  

Such financial activities are conducted through institutionalised formal exchanges or over-the-counter (OTC) marketplaces that operate under a defined set of regulations. There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities.  

In Australia, the exchange is called the Australian Stock Exchange or ASX, there is only one primary market in Australia, however, in markets like the USA, there can be (and are) a number of exchanges set up such as the New York Stock Exchange (NYSE), Nasdaq, BATS and the Chicago Board Operations Exchange (CBOE).

The CBOE was responsible in part for the Cryptocurrency crash when it offered derivative options to bet against the market back in early 2018.

[4] https://dictionary.cambridge.org/dictionary/english/bond

[5] https://www.bondexchange.com.au/

How much you invest, what you invest in, for how long and at which risk level is all up to your personal & financial situation. You should never invest more than you can afford to part with, as you never know what is around the corner. This is not an effort to be a ‘doomsday alarmist’, it is just a fact of prudent investing.

Take the global financial crisis for example, as previously mentioned, alternative investments – such as the Credit Default Swaps (CDS) that were created by Dr Michael J Burry as an ‘alternative investment’, to bet against what 90% of the advisors in the markets were doing. And it came to fruition.

As such, mum and dad investors that couldn’t afford it were suddenly homeless, left without any retirement savings and having to go back into a job market, where there were no jobs.

Investing has peaks and troughs, and you need to be able to ride through them to get to your investment goals.

In short, if you are an investor that is just starting out, has little disposable income and savings, then educating yourself in shares and savings accounts is a far more responsible path than investing in a property investment fund, hedge fund or CFD. However, a managed fund may be a way forward, but it is all dependent on your liquidity, age, investment expertise and of course goals.

All of this and more will become clearer as we unpack each of the investment types, their features, advantages, benefits and of course pitfalls.

Why does one walk into a restaurant and order the same thing they had last time, fly with the same airline or by a particular brand of toothpaste? Familiarity, loyalty and an understanding of the performance or ‘potential performance’ of the product or service offering.

Investors behave no differently, except for one key factor. As the GFC proved, nothing was immune to market distribution, innovation or collapse. Sure, equity markets can gain back losses over time, real estate markets can rebuild, but considering how much more is at stake with an investment, rather than the performance of toothpaste, there is a lot more to be considered.

One of the key differentiators between traditional markets and alternative investment markets is the ‘access’ at which investors have to each of the investment categories discussed. For example, with a tax file number (TFN) and a bank account, most major banks have an online trading platform that they are all too happy to guide new investors through getting their CHESS number (Clearing House Electronic Sub-register System), upload funds and start making trades.

Whereas to access a hedge fund or debt facility fund, there are minimum hurdle rates that one must be able to often prove and have their accountant sign off on in order to invest the funds. For example, a term that will be used often throughout this document is that of the ‘sophisticated investor’.

Within Australia – and most equivalent capital markets for that matter – by definition a sophisticated investor must be able to invest a minimum $250,000 into a fund or investment scheme, while also holding $2.5 million in assets. This would make them highly ‘liquid’ as individuals, and in many ways in the top 10-15% of all Australians.

Although there are other ‘funds’ available for investment on the ASX (Australian Stock Exchange) for as little as $250 minimum investment, traditional investments were the only ones within the grasp of many investors from all over the world.

With the world experiencing “historically low-interest rates and the enduring effect of quantitative easing are making markets expensive, investors continue to turn to alternative asset classes.

Furthermore, changes in how we work and live, prompted by new technology, innovative business models, geopolitical shifts and emerging lifestyle choices, could render many real assets obsolete while creating opportunities elsewhere.”[3]

The key differences between traditional and alternative investments are outlined below.

Liquidity

Traditional investments are often more attractive to new investors or those with a low-risk tolerance, due to the fact they are highly liquid. In other words, they can be sold or moved on very quickly for cash. Meanwhile, alternative investments often ‘tie up cash’ for set periods of time – as set out in the prospectus documents or information memorandums – or are harder to move on for investors.

This is often due to the more specialised nature or requirements of the funds by the fund or asset managers of alternative investments, vs. managers of traditional assets, which can be easily bought and sold on the ASX or through traditional market vehicles.

Information and Support

Traditional investors are often very guarded about their ‘trade secrets’ or ‘tricks of the trade’ in how they made their money. Whereas alternative investment managers often provide too much information for the average investor to comprehend. This includes training courses, information memorandums, feasibility studies, investment seminars and more.

The level of involvement or support from managers is often specific to their asset class and business model, however alternative investments often provide far more transparency in their dealings with both new time and seasoned investors.

Return on Investment

Undoubtedly “the money shot” or the biggest difference between traditional and alternative investments is that of Return on Investment (ROI). Alternative investments as a ‘general rule’ provide significantly higher returns on investment than that provided by traditional investment classes.

This in large part is due to the associated ‘risk’ of alternative investments, however, it must also be noted that even in tough economic times, alternative investments often thrive. In fact, many alternative investments are created and geared to do just that. When traditional investments are suffering losses – such as during the 2008 Global Financial Crisis – alternative asset classes thrive.

Many alternative assets as mentioned are designed to do exactly that, such as hedging vehicles for investor’s asset portfolios. As they often require a smaller investment to realise significant returns should their conditions be met for a ‘payout’ scenario on the alternative.

With financial products, there are risks of losses, and should you or your fund manager take a leveraged position or trade in leveraged financial products (such as derivatives), your losses could exceed your initial investment.

[3] PWC (2018) “Rediscovering alternative assets in changing times”

As its name suggests, alternative investments are those investments that are outside of what may be considered as ‘traditional’ or asset classes, or ‘bricks and mortar investments’.

According to the World Economic Forum, “alternative investment assets are those which are not part of traditional asset classes such as cash, stocks, or bonds that retail investors are most familiar with. Such a definition would encompass investing in mainstream assets such as real estate or commodities or luxury goods such as art or wine”[1].

Alternative investments encompass a wide range of asset classes, including private equity real estate and private equity infrastructure funds, secondary funds, and private debt funds. In particular the three asset classes: private equity buyouts, hedge funds, and venture capital have historically played the most important role in the evolution of the industry and have accounted for the vast majority of the capital allocated to alternatives.[2]

With such a definition in place, one could consider an alternative investment to be almost anything outside of the traditional investment assets mentioned, however, as figure 1 outlines from the same source, they are anything but investing money into simply anything.

Figure 1: Overview of different types of investments

When placed into the five strategic investment segments as outlined in figure 1.1, there is clearly a core competitive advantage identifiable with ‘alternative asset classes’, rather than the ‘traditional, tangible and other investment classes as a whole.

That being said, it must always be remembered as an investor, based on your level of risk tolerance, your access to capital that can be readily spent on investing, not to mention your skills and market experience, different asset types would – including non-traditional asset classes – offer significant opportunities to investors under the right expert advice or guidance.

[1] World Economic Forum (2015), “Alternative Investments 2020, An introduction to Alternative investments”, July 2015 

[2] World Economic Forum (2015), “Alternative Investments 2020, An introduction to Alternative investments”, July 2015

Weigh the situation, then move – Sun Tzu

Your financial journey is now in your hands. This Walker Capital eBook has provided you with the details of the product, price, place, people and processes of financial planning – now it’s up to you to make it happen.

The next steps are to look inwards, review your current financial situation, download an excel spreadsheet template of a personal budget – if you don’t already have one – and start getting prepared to meet with a financial planner.

Speak to your friends, accountant, lawyer and see if there are any names that come up more than once. The key is don’t just to run to the biggest name in town, they will often have a standardised offering, non-flexible pricing and mediocre returns.

There are many financial planners out there, but the key is to find the one best suited to you, your family and your financial needs and risk tolerance – remember, you are the client, it is your call.

Walker Capital are an established financial investment, fund manager and financial services company based all around Australia.

With a dedicated financial planning network expanding exponentially, Walker Capital have independent advisors, with objective thinking. Being part of a national network means Walker Capital get access to the best investment opportunities across a wide range of classes.

Being a vertically integrated business there are internal & external opportunities that are available to clients, while also never creating a fund or a product without themselves investing or using it – a mark of faith in a product if there ever was one.

Your financial journey should be that of a learning, growing and rewarding experience, pick the financial planner who shares your vision, understands your goals and objectives and, most importantly, understands you.

Congratulations today is your day, your off to great places your off on your way – Dr. Seuss