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When shares are eventually sold, the difference between the purchase and selling price is the profit.
However, shares can also earn money another way, through dividends. Dividends are paid annually and are taxed separately from investment income, and are paid as a sum per share owned. The amount of dividend paid depends on company performance and other factors decided by the board. Not all shares pay dividends, and here is where the balance is found.
In general, large, well-established companies pay dividends on their shares. However, those large companies also tend to have shares that have slow price movement too.
Smaller companies have much greater scope for rapid growth, and as a consequence, those shares can see quick price movements in their value too, however, they rarely offer dividend payments.
In the context of share investments, these are relatively low risk, with the dividend providing a profit boost that goes some way to offsetting the slower price growth.
However, for smaller, younger companies, where shares can offer the potential for both fast growth and large price movements, there is a higher risk. If you examine what a share is, it is easy to see why.
The more volatile shares are related to smaller and younger companies, and for those less established organizations, while the opportunity for rapid growth is greater, the risk of failure is also much higher. That could lead to a collapse of share price, which in return results in investment losses.
As with any kind of investment, investing in shares is all about balancing risk and return, and in this case, building a portfolio of shares that offer a blend of different risk profiles and profit potential presents an effective solution. How investors achieve that brings us to the next choice.
For those looking for managed accounts, the choice of provider also matters, and there are a number of factors to consider.
Cost is obviously something to look at, this comes in two parts. Firstly, the minimum initial investment for a managed account, some require a significant investment to qualify, while others have a more modest initial investment requirement.
The other is the cost of the management service. This usually takes the form of a percentage of returns and a fixed fee.
When looking at fees, always look for projected returns too, while the fee percentage may be a little higher with a fund, if they also deliver larger returns, it could still offer better value than others.
Perhaps the most important aspect though is the risk. The level of risk we are comfortable with is different for every investor. Managed funds usually allow for tailoring of risk profiles to suit, but it is important to ensure that a chosen management solution reaches risk levels you are comfortable with.
For those using a managed service, opening an account and setting risks gets things started.
For those looking to buy shares themselves, opening an account with an online broker gets you started.
After that, the question is, how much and where to invest? With a managed account, the question of what shares to invest in is taken care of for you. For those wanting a more hands-on approach, research is the key. Understanding the companies being invested in, and the overriding economic situation is crucial to making informed investment decisions.
An important question for both types of investment, the amount invested has to be considered in relation to risk.
Investment in shares carries a higher risk than many alternatives and with it the potential for significant growth. In this way, in a long-term investment program, shares are a useful driver of growth, but should always be a small portion of your overall investment fund.
