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The beginner’s guide to shares

When you’re starting out in share trading, it helps to know exactly what a share is and how it works. The good news is, it’s probably a lot less complicated than you think. This guide could get you started and help you decide if share trading is right for you.

01

Definition of a ‘share’

A ‘share’ is a small unit of ownership in a company. When you buy a share, you’re buying a piece of a company. Each share represents an equal portion of the company's total capital – the more shares you own, the greater the portion of ownership you have.

Shares can also be called ‘stocks’, ‘equities’ or ‘securities’.

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02

How shares work

Shares can be listed on the stock exchange

The stock exchange is where shares are publicly listed and traded. Each share has a buy price (called a ‘bid’) and a sell price (called an ‘ask’). The New Zealand stock exchange is the NZX and the Australian stock exchange is the ASX.

You buy and sell shares through a stock broker

To buy and sell shares on the stock exchange (called ‘trading’) you’ll need to place an order through a stock broker – this is a company licensed to give investors access to the stock exchange. Some brokers offer advice, while others, like ASB Securities, offer online share trading services for investors who prefer to make their own share trading decisions.

Share prices can go up and down

Share prices are influenced by things like the performance of a company, general economic conditions, and what the market (buyers and sellers) think the shares are worth. News about a particular company may be evaluated by investors, and how they react could cause share prices to suddenly go up or down.

Share ownership

When you buy NZ shares, you’ll receive a holdings statement from a share registry that shows you own those shares. You may also receive financial reports and get voting rights on shareholder decisions. Once you own shares, you can generally sell them at any time.

03

Why invest in shares?

Shares can be a good way to grow wealth over time, as part of a wider investment stratagy.

There are two main reasons people choose to invest in shares over the long term.

  • Firstly, shares have the potential to increase in capital value over time.
  • And secondly, shares can sometimes offer an income in the form of dividends.

Unlike a bank deposit, money invested in shares has the potential to increase in value and protect your investment against inflation.

Having said that, shares can go down in value too. That's why most people only invest in shares as part of a diversified portfolio.

Some people also like to take advantage of the fluctuations in share prices by buying and selling in the short term, with the aim of making a financial gain.

04

How share trading can make you money

There are two key ways you may be able to make money from shares: 

Capital gains

People buy shares with the aim of making capital gains. When you buy shares for one price, then sell them at a higher price, you make capital gains. Likewise, you could make a capital loss if you sold your shares for a lower price than you bought them for.

Dividends

This is a payment a company makes to its shareholders. Often the dividend is a share of the company's profits, but sometimes it can be paid for other reasons. Some companies pay dividends regularly (say once a year) or on an ad-hoc basis, while some companies don't pay dividends at all. If you're looking for regular income from your investment, then this is something you need to consider when choosing which shares to invest in.

05

Risks of investing in shares

Like any investment, investing in shares has its risks. The two main types of risks are:

  • Volatility risk. This is when the share price goes up and down. This could be due to factors such as changes in the company’s profits or changes in economic conditions. If share prices fall, you would see a change in the market value of your holdings but you wouldn’t actually lose money unless you sold your shares.
  • Absolute risk. This is the risk that your shares will be worth nothing, for example if the company goes out of business.

Ways to manage risk when investing in shares

  • Diversify your share holdings. You can spread your risk by investing in a variety of shares from different companies and industries. This means if one industry or company goes down, you may still have other shares to balance out the losses.
  • Diversify your investments. You can spread your risk further by investing in more than just shares. For example you may like to explore other investment options such as fixed interest securities, term investments and exchange traded funds, which are available through ASB Securities.
  • Focus on the long term. Because share prices may go up and down in the short term, you don’t want to be forced to sell if you need to free up money, especially when prices are low. Historically, money invested in shares has tended to hold or grow in value faster than inflation.
  • Do your research. Before you invest, it’s a good idea to research the company and industry and find out how their shares have been performing, although this is not an indication of future performance. ASB Securities Online Share Trading gives you access to a range of reports and research tools to help you make informed choices.

06

How to learn more about different shares

It’s important to do your research on different shares, companies and industries before you buy. If you’re unsure on what your approach to trading may be, or would like some pointers on what you should consider when comparing shares, take a look at our helpful guide for deciding what to invest in.

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ASB Securities Limited is a NZX Firm. ASB Securities terms and conditions apply. The above information is a guide only and should not be relied on as it does not take into account your personal financial situation.

ASB Securities The beginner’s guide to shares