Basically they are all the same. They simply mean ownership
or part ownership in a company or business. Let’s say
you start up a business in Bali with your own money. You are
then effectively the sole owner or shareholder. All the profits
and any increase in capital value belong to you. Now let’s
say that you go in 50-50 with a friend. In this case you hold
equal shares in the business. If you are more ambitious and
seek to establish a larger business and find others to join
you they all become shareholders in proportion to how much
they put into the enterprise. Once a business becomes very
large you can ‘go public’ and your company can
be listed on a stock exchange. At this point anyone in the
world can theoretically buy a share in your company.
Is it safe to invest in shares?
This is not a question that any American would ask because
share ownership has always been part of the American culture
and is one of the reasons for the commercial strength of the
USA. For many others however, shares are often associated
with high risk, stock market crashes etc. Tales of lost fortunes
of investors in failed companies such as Enron, WorldCom etc.
do not help. The fact is, nevertheless, that the capitalist
world revolves around share ownership and businesses that
exist to make a profit. Alternative models like communism
have proven not to work. Some companies fall by the wayside
but the majority continue to grow and to make money. If they
did not, the capitalist system would collapse. If you want
to be part of the success story and see your money grow in
real terms over the long term you must own shares.
Risk is a function of time and diversity
If I am asked by an individual if it is a good idea to invest
in shares I cannot answer without knowing more about the financial
position, plans and needs of the person concerned. For example,
I have met people and received enquiries from people in Bali
with a limited amount of savings in the bank but who are aware
of the greater potential returns from stock market investments.
But to invest one’s limited means in the stock market
is a recipe for disaster since values can fall for several
years during a really bad bear market (such as 2000 to 2003)
so if there is a sudden need for cash there is a risk of heavy
losses. Also, if limited funds are available the number of
stocks or funds that can be purchased is also going to be
limited, thus increasing risk further through lack of diversity.
On the other hand, a person with ample cash and who can afford
not to see his or her money for say at least ten years can
accept short term risk in return for the likelihood of strong
gains over the long term. So where stocks are concerned, risk
is very much a function of time and diversity.
How do you buy shares?
Basically through a stockbroker but unless you are very wealthy
and have a lot of time on your hands it is safer and more
practicable to buy them indirectly via collective investment
schemes, otherwise known variously as unit trusts, SICAVS,
managed funds or mutual funds. Why not buy shares directly?
Because share selection demands a high degree of expertise
and information which is not readily available to the average
investor. You also need to invest a sizeable amount in each
company to make the purchase viable. This means that unless
you have a very significant sum to invest you will be limited
to shares of just a few companies, which is potentially risky.
Collective investment vehicles, however, invest in a large
number of companies, usually around 100 per fund, thus spreading
the risk. How do you get into these collective investments?
You can apply directly to a fund house such as Fidelity, Investec,
JF etc., or you can access a variety of fund houses by investing
in a life product from the likes of Skandia, Friends Provident,
Hansard, Generali, Zurich etc. These will normally accept
applications only via a financial adviser and the investment
can be in the form of a lump sum or regular contributions.
So, are shares for you?
If you have solid savings and a regular income then they are
one of the best ways of building long term wealth. But only
if you are prepared to stick with them for the long term.
Property is another means but property is less liquid and
you may be obliged to hold on for longer than is comfortable
when you need to raise cash. If you are seeking a quick fortune
then maybe you should try the casino. But remember the odds
are in favour of the casino; at least with shares everyone
gets a fair chance!
Colin Bloodworth is a senior adviser with Financial Partners
International. The opinions expressed are his own. If you
have any questions regarding personal finance you may contact
him at 021 520 8099 or colin.bloodworth@financial-partners.biz
