CHOICE guide to buying shares

The plunging share market is attracting bargain hunters. CHOICE guides first-time investors through their options.
 
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01.Introduction

Shares board

In brief

  • Managed funds and index funds enable investors to regularly drip-feed small amounts into shares.
  • For those who want to buy shares directly, stockbrokers’ fees and services vary.
  • A company’s past performance is not an indicator of future performance.

In the past 18 months Australian shares have followed world indices deep into the red, falling by over 50% (see graph below). It’s been the second-worst crash in our share market’s history, and a devastating time for investors, particularly those who’ve seen the value of their superannuation funds plummet. Despite the market hitting a five-year low, the worst may not be over, with further ups and downs likely in this volatile and uncertain economic environment.

Nevertheless, some industry commentators say such declines have left Australian shares looking relatively cheap, providing capital growth opportunities for long-term investors. Some are calling this a “two for one sale”, pointing to the relatively low price of shares compared with company earnings, as well as dividend rates that far exceed the income you’d earn from a term deposit. They further point out that in the past, the Australian index has always rebounded from bear markets.

However, there’s no certainty that the domestic share market will rise again – or by how much and how quickly (they could continue to decline). It’s also worth noting that none of the experts predicted the extent of the global financial crisis we’re now experiencing.

Please note: this information was current as of March 2009 but is still a useful guide to today's market.


Your options

Should you decide to invest in shares, there are plenty of ways to benefit from a bounce-back, whether you have lots of money to invest at once or would like to “drip feed” small amounts into a share fund over time. CHOICE considers some of your options, including:

  • Buying shares directly through a stockbroker.
  • Letting an expert do the hard work for you with a managed fund.
  • Tracking the market with an index fund or exchange traded fund.

If you decide to take the plunge and invest in shares, make sure you understand the risk of further market declines and continuing volatility, and consider getting licensed financial advice.

Rise & fall of Aust. shares

Source: Australian Stock Exchange data quoted at www.abs.gov.au, except closing price for 2 March 2009, taken from www.asx.com.au

Shares don't always rise in the long term

There’s no guarantee that Australian shares will recover to former glories or, if they do, how long it will take. While it’s arguable Australian investors have been conditioned into thinking our share index will always go up in the long term, some other countries have had a very different experience. In Japan the share market has just hit its lowest point in 20 years and is now more than 80% below 1989 levels (as the chart shows). Not only has the Japanese index failed to recover from its crash in the early 1990s, when share values declined by 59% in just two-and-a-half years, it’s actually gone lower again and hasn’t shown any signs of recovery, with the economy in recession and predicted to continue shrinking in 2009.

Japan serves as a warning to all those investors who believe share prices must always rise.
Fall of Japanese shares

 
 

 

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