In this week’s episode, of The Rentvesting Podcast, Louis is sharing his share stories with us.
We’re talking about:
- An article we read about Millenials, who are buying shares and why that is
- What shares are
- Some of the risks when buying shares
- Why you would want to access them and how
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Why should I buy shares?
Let’s take a look back and see why shares are on the rise. The ABC came up with this article about Millenials buying shares at a record rate. Basically telling us why they’re a good alternative to property, which is why we’re seeing them boom. You just need money to buy shares, no deposit or anything.
They have been the best performing asset out of any asset for the past 100 years – if you look all the way back.
The Stockspot founder has commented that over the next seven years shares might be a better investment than property. Because if you’re buying a property the income yield is lower than what an average share would pay you at the moment.
What are shares?
They’re simply having part ownership in a listed company on the Australian Stock Exchange, So if you buy shares in Telstra, you’ll own a tiny portion of the company.
Being an owner, you have voting rights and depending on how many shares you own determines your percentage of voting rights.
On the share market, good companies go up in value and bad companies go down. This comes back to the supply and demand relationship.
On the share market, their supplies are fairly fixed.
The demand, however, does change on a daily basis. So if people freak out and sell, the demand goes down and the price goes down.
That’s why you see big drops and changes in shares every day.
Being an owner you’re entitled to a portion of the companies profit, which comes in form of a dividend. This is usually paid every six months.
The most common is a free cash flow valuation, where you’ve got assumptions and numbers of what cash flow looks like. A share is valued by the free cash flow a company has and how much spare cash it has. If they pay investors, that will push the price up as well. The important thing is, the value is not what the price is currently traded at.
If a company is valued at $5 and it’s trading at $5.20 then there’s a discrepancy between them.
There are some massive research houses like Morningstar who figure out these values. However, you can get some discrepancy between companies too.
Why are people investing in shares?
The property market is big and you’ve got to have a lot of spare cash to buy it and there’s no liquidity. Whereas with shares, if you need cash quickly, you can take the money out.
If you wanted to buy some shares (like just one,) you’re paying $20 a brokerage for buying a share for $3. It doesn’t make sense to buy shares daily on a ‘lunch money’ basis, but it becomes cost economical if you’re making money out of the asset. Having the liquidity there is how you get your money, yet property isn’t so liquid.
Instead on the share market, you’ve got millions of investors constantly buying and selling.
Tax effective income
Because companies pay you their profit, they’ve paid tax on that prior. To avoid double taxation, at tax time you can get that 30% the company has paid back in a form of franking credit.
Why does it suck?
Volatility, where shares can lose value quickly. But it can be mitigated against easily. There will always be volatility but it can be your friend because growth comes from this too.
- Get some diversification and don’t put all your money into one share.
- Get a number of different shares in different portfolios.
- Have other shares that aren’t in one industry. Don’t go for just all the big banks because they’re in the same market.
Consider: If the economy is tough what are some things that will still be required? Supermarkets, pharmacies and those sort of areas are always a requirement.
Also, consider who is running the company and what is driving them. Decisions made by CEO’s will make a big difference to the company.
Where can I get shares?
You can buy shares directly through brokerage platforms like Commsec otherwise parties that aren’t aligned like desktop brokers.
The biggest thing to consider are the transaction costs, which can cost you a lot.
If you’re going for monthly savings and diversification style, indirectly can be good too. This is through exchanged traded funds (ETF) which are a basket of shares. For example, if you choose the ASX50, this is in the 50 biggest companies in Australia. The management fees are a lot lower (0.1% is average). So if you invest $1,000 you’re looking at about $1 fee, but there are standard brokerage set up fees too. These are very passive, you just sit on it and ride it out, which is why the management fees are low.
Managed funds are much more active. Like a company, a managed investment comes down to the individual who is in charge.
When finding a manager look at their performance and review it for a 10-year return.
Look at their volatility and if they have a low 10-year return you know they haven’t done their job well. If they have low standard deviation and a decent return you know they can mitigate market risks better.
- A record number of people under 35 are buying shares now because it’s a good wealth building strategy.
- Shares are an ownership of a listed company under the Australian Stock Exchange. There are some major setbacks, volatility being one, buying a bad single investment or having bad management.
- But through good diversification and even buying internationally, this can help increase the upside of them.
- Shares are a long term investment and they don’t have the same ongoing cost of property and give you franking credits.
The Rentvesting Podcast, available on iTunes, was created by Red & Co’s Jayden Vecchio and expert financial planner Louis Strange. Together, Jayden and Louis unpack the facts behind the property market, explain what’s really going on & where the market is heading. They believe in challenging the status quo and want to get out there to educate absolutely anyone looking to enter the property market.