Ignorance and fear often lead to misconceptions about stocks

How to buy shares is a mystery to many people. One such reader emailed asking for a back-to-basics article on the subject of DIY share investing.

A share (sometimes called a stock) is a small part of a company. If you buy a share, you literally own a tiny part of the company.

You make money on shares in two ways. The first is when you receive a dividend, which is a portion of that company's annual profit. The second is through capital gains. When share prices increase as a result of supply and demand, you can sell for a profit and the profit you make is a capital gain - although you need to take into account inflation.

Shares are bought through brokers (officially called advisers thanks to the Financial Advisers Act) or directly through an online dealing website such as the ones offered by the ASB and ANZ banks. The advisers and banks take a percentage of the purchase as a fee called brokerage.


If you start talking about shares you'll pretty soon come across someone who sucks air through his or her teeth and says that it's risky - although that person is probably commenting out of ignorance. The risks are that the company will crash and burn and your share becomes worthless or that you need to sell your shares at a time when they are worth less than you paid for them and you make a loss.

If you've invested in reasonably strong companies such as Fletcher Building, Infratil, Rio Tinto or AMP, your shares are unlikely to vaporise overnight unless our economic system collapses and if that happened we'd have much bigger problems than the loss of a few shares.

To make it safer, most investors buy shares in multiple companies. If you spread your money across 10 or 20 companies and one has a bad year, then the returns from the others should make up for it. Overall, if you've chosen wisely, you'll do better financially than you would if you deposited the money in the bank.

We're not particularly share-friendly in New Zealand. When Craigs Investment Partners' adviser Gretchen Williamson worked in Sydney, the Australian Securities Exchange (ASX) held information sessions that were attended by hundreds of people.

Here, there are few places to go to learn about share investing. Those that do invest often do so because their parents or other family members do, says Williamson.

A lot of Kiwis don't even realise they already invest in shares. If they have KiwiSaver, they almost certainly own New Zealand, Australian and perhaps some other shares.

The advantage of buying individual shares rather than through an institution's managed investment fund is that you don't pay the fees, which are often hidden in a fund and affect its growth.

The disadvantage is that you're not spreading your risk. If you invest in Auckland International Airport or Ryman Healthcare your dividends and capital gains are dependent on a single company's fortunes, which could be affected by management decisions or other factors that are not even within their control.

On the other hand, investing in individual stocks is a great way to follow a few companies' fortunes and educate yourself at the same time.

If you really want to learn then you need to follow all the news about your company or companies and consider going to the annual meetings where you'll rub shoulders with the people who are running the business.

Company news can be found in the New Zealand Herald and on the NZX or other exchanges' websites. There is usually an "investor centre" on company websites, which may have other useful information such as analyst coverage.

Although it's best to buy shares in more than one company to spread the risk, some newbies start off with a single company. This is often a company that plays some part in their life or makes/sells things that they use - Trade Me, for instance, or the Warehouse or Contact Energy.

If you're willing to take a chance with smaller companies, there are some well-known companies on the NZX Alternative Market (NZAX) such as Snakk Media and Burger Fuel.

As well as individual companies, you can buy "exchange traded fund" shares. An example is the smartFONZ. The fund buys shares in every company in the NZX 50 index so the risk is spread.

There are other ways to buy small parcels of shares. CraigsIP has a mySTART account, which allows investors to drip-feed in as little as $100 a month and choose shares from a list of more than 100. It's also possible to join share clubs, as I wrote about recently (see article online here: tinyurl.com/kz8gas6).

I bought my first shares aged 12 and back then you would call your broker, discuss what you wanted to buy and place an order.

These days you can usually buy your shares online. With my bank it's simply another tab on the online banking application. I click "place an order" and fill in the stock and the quantity and can choose a limit price if I want. The shares are bought in the next few hours and the money automatically debited from my chosen bank account. The shares are held in share registries such as Computershare and I get regular statements showing my holdings.

As well as New Zealand shares it's easy to buy Australian shares. At the ASB, for example, it costs almost the same to buy New Zealand and Australian shares. That's 0.3 per cent with a minimum of $30 for online orders and 0.7 per cent with a minimum of $35 for telephone orders. The minimums for New Zealand are in New Zealand dollars and the Australian minimums are in Australian currency, which means you pay slightly more for Australian trades. It gets more expensive when you want to buy shares in other overseas exchanges unless you can open an account in those countries.

Getting broker advice is where it starts to get tricky.

Back in the day, says Nick Hegan, head of legal and compliance at Forsyth Barr, you would pick up the phone to the broker and tell him or her what you wanted to buy or sell. The broker might say, "Yep, we think that's good," and place the order, he says.

The Financial Advisers Act created two main types of customers - "class advice" (execution only) customers and advisory customers who get personalised advice, but pay more for it.

Thanks to the act, brokers can no longer tell ordinary execution-only customers what shares to buy, says Hegan.

Brokers can still give generic recommendations to execution-only clients and often have reports on companies, which they can send to you so you can make your own decisions. Brokers and banks often have recommendations on their websites.

With advisory clients, the broker must do a fact-finding exercise before they provide personalised advice, says Hegan. The adviser also needs to produce documents justifying the advice.

Brokers are confined by law in what they can talk about to the general public. When asked what she would tell a budding investor at a barbecue, Williamson says it is very difficult.

"I am hardly allowed to say anything. I try to get people to think about where the world is going, what the future looks like and where demand is going to come from."

She will often suggest that people buy a mix of boring companies, such as utilities companies, and growth ones such as healthcare. The boring companies have good dividends and the growth ones will provide more capital growth.

CraigsIP runs Women's Wealth seminars. The next is on September 11 in Tauranga.

The New Zealand Shareholders Association offers night classes for beginners at Glenfield and Western Springs Colleges in Auckland.