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FIRST
TIME INVESTING
There
is also a lot of information available from different sources on what type you
wish to invest in, for example libraries, advisors, etc. There are also
supplementary costs on most types, e.g. legal fees for Real Estate or Broker's
fees for shares. You can manage the investment yourself or get a broker or
agent to do it for you. The latter costs money. By doing it yourself you gain
experience. Learning from one's mistakes is an important process through life.
There are people available who will assist you occasionally at no cost.
·
Real Estate
·
The Share market
·
Debentures (with Finance
Companies) or Term Deposits (with Banks)
·
Insurance
This
type generally requires a large initial amount of money, and there are also
legal fees associated with it in its purchase or sale. The risks are moderate.
Caveat Emptor always applies. Sometimes what you are buying is not immediately
obvious. The property will have to comply with the bylaws of the area where it
is sited. Rates and upkeep will be a regular expense.
If
you intend to rent it out then the investment's day to day management will be
required. This type of investment has a good return, and expenses and
depreciation can be balanced against one's taxable income. This overall income
is taxable. One still has in reserve the value of land and buildings. The land,
through its scarcity generally rises in value. The sale or purchase of Real
Estate is generally a slow process (compared to say the sharemarket) and funds
may not be quickly forthcoming if needed. If a sale is made the funds available
may be much more than is required. Also, finding the right place may take a
while ( if that is important). Considering the large amount of money involved
initially in buying or selling, I would not recommend this as a starting point.
Other
Real Estate investments involve a share in a larger building. One has to be
careful of the conditions involved and the risk might be worse than initially
expected. A lawyer might be required and their fees are usually expensive.
There will probably be less day to day management, but one has to be clear
about the competence of the management and conditions.
The Sharemarket
Companies can be Private or Public ones. Only Public companies can be listed on
the Stock Exchange. Not all Public companies are listed. I am speaking of
Limited Liability companies. They must comply with the Companies Act. The Stock
Exchange has set broad rules which listed companies must comply with. There are
agents called Share or Stock Broking firms which act between the buyer and
seller. The brokers must be registered with the Stock Exchange Association. The
amount of outlay is normally much smaller than Real Estate. Possibly a few
thousand dollars. With a purchase or sale of the size just mentioned the
broking fee should be less than $100. The shares are bought in lots called
parcels. The minimum parcel is 100 shares or multiples thereof, although it
pays to buy at least several thousand dollars worth. There is a minimum brokerage
fee. Information on the listed companies is relatively easily obtained, through
such avenues as the firm one intends to invest in (such as Annual Reports,
which give an overview of the company, its performance, annual accounts, and
company statistics), Broking firms, newspapers and the internet.
One
has a diverse range of types of companies to choose from. For example - Banking
& Investment, Liquor & Food, Forestry & Resources,
Manufacturing/Services, Media & Communications, Primary Sector, Property
& Construction, Retail, Tourism & Transport.
With shares, as against Real Estate (in the previous section), one can spread
the risk by what one invests in using the same or less money. The purchase or
sale of shares are more fluid. That is there is less time delay in the process
and one can adjust how much to sell or buy in smaller amounts. The return
on shares is generally good. But one must do one's homework - by getting or
souring information. Share broking firms usually send regular information to
their clients as well as providing free advice to help investors make
decisions. The price of shares changes from one day to the next, generally
through supply and demand. Company announcements or economic information can
influence the prices of firms, sectors, or the whole scene. In NZ a share index
exists reflecting the movement of the top 40 shares ( in size). This
information is widely published. Just as we have a share index, so do other
countries. Because of the speed of telecommunications, movements in the indices
or share prices in one country can quickly influence another.
What to look for
Past and present information are used to give an indication of the future. One
of most important indications of the future performance and hence share price
is good management. If the management is not good the performance will be
expected to be poor. One should spread one's investment among companies and
sectors to reduce the risk. There is always an element of risk in investment.
There
are various statistical indices about companies which help one in making a
decision as to which one to buy or sell. The Price/Earnings (PE) ratio is
useful. The Earnings described is the Profit after tax divided by the number of
shares in the company. If the PE is between 13 and 19 it is likely to be a good
buy. Banks tend to have a lower PE ratio of about 7-9. Otherwise for other
types of companies, outside 13-19, there might be some other factor distorting
this index. It might be speculation, a pending takeover by another company or
something else.
Other factors about the company must be taken into account. Another one is the
Gearing Ratio(%).
= Long Term Debts + Shareholders Funds
Dividends are very similar to the interest you receive from bank account
savings. They are taxable.
If
the Gearing Ratio is less than about 45% the financial state of the company is
good. If it is between about 45% and 55% it is reasonable. If it is over 55%
then the state of the company is becomes questionable. It also useful to
compare when buying or selling the annual high and low of the annual share
price. The latter should be used with caution.
One
must always consider factors outside the company's direct control that could
influence its performance when deciding which ones to invest in. Many
people have made the mistake of thinking the price will go up forever. The
sharemarket moves in cycles, having peaks and troughs. At the peak when it
crashes the share prices suddenly plummet. This is when demand exceeds supply.
The prices are artificially high and continued buying at that price cannot
support the price. There are what are called technical adjustments from time to
time which are mini crashes, as corrections are made to the share price.
Taxwise for the personal investor I have found shares good. The dividends, as a
source of income are relatively small. The main gain is in the increase of the
value of the shares, which is non-taxable in NZ. Reviews of the shares one
holds is an important part of managing your share portfolio. To do this well
takes time and cannot be gained overnight. Even the best investors make
mistakes. Another rule is never borrow to invest in the sharemarket. If the
investment turns out to be poor, you might end up in debt, having to repay the
money you borrowed.
As a
shareholder you have voting rights on the appointment of directors and issues
as they arise from time to time. The day to day running of the company is by
management who are responsible to the directors. You are also eligible to
receive regular Annual and Half-yearly reports. These keep you informed about
your investments. They do not always tell you the whole story. So the other
sources already mentioned are also useful.
Debentures (with Finance
Companies)
These
and Term Deposits in a Bank are similar. For Debentures you can get a Finance
Company to send you a Prospectus (no charge), just as you can get brochures
about Term Deposits at Banks. It pays to phone the bank or finance company for
more specific details to suit your requirements.
All
the income you get is taxable. It might be less risky than shares but you don't
get any benefit from non-taxable income. You are normally required to invest a
minimum amount of several thousand dollars. Possible alternatives are usually
available in these and one can choose the package to meet one's needs. What you
choose generally remains in place until the end of the term. If one attempts to
change the conditions during the term, you might not be able to, or it may cost
you dearly in what income you receive. The flexibility of the sharemarket no
longer exists. It is best not to make the length of the term too long. This
allows you to adjust your investment to changing situations as time passes.
Other than the choice of the plan, the management of the funds is out of your
hands.
Debenture interest rates (from Finance Companies) tend to be higher than Term
Deposits (in Banks). The risk with a Finance Company may be higher, although
there are a number of good finance companies. With finance companies,
frequently you are mailed possible new packages available subsequent to your
initial investment with them, giving you enhanced options for other packages.
Insurance
Insurance is useful in specialized cases where the package provides things that
would not be provided otherwise in the event of the unexpected such as house,
contents, car or medical. Insurance for retirement is an idea that has been
floated by Government. But the return would be low. I do not recommend it.
Conclusion
With
an initial bit of work and reading other sources about investing from, say, the
library, and advice from Broking firm advisor, with a little money one can
start making financial gains in such areas as the sharemarket. Through gaining
experience and saving more you can plan your life to suit your needs and wants.
An important part of investing and management is saving. The more you save and
invest, the greater the financial and associated rewards will be. Some types of
investing require more personal input than others. When you are managing Real
Estate more time is involved. Less time is required for the others.
For shares there are a number of leading listed companies available. When you
become more experienced, you may also consider investing overseas. This is not
necessarily more risky. There are many excellent companies to invest in
overseas. After some experience in NZ, Australia would be a useful next step.
