Share trading - benefits and risks

The benefits

Capital Growth

Share investments will generally offer the potential for the highest returns of all asset classes over the medium-to-long term. However, share investments also exhibit the highest fluctuations in value in the short term. The return achieved will be influenced by factors such as company earnings, interest rates and the general economic outlook.

Income

Companies often pay much of their net profits out to shareholders in the form of dividends. Dividends could supplement an investor's income, or provide an income stream in retirement.

Ease of buying and selling

Compared to some other investments, such as direct property, shares can generally (but not always) be sold quickly and easily. And unlike selling a property, you can sell only part of your shareholding.

Weighing up the risks

Volatility risk

Share prices can rise and fall rapidly. When investing in the share market you need to be aware that the value of your shares may fluctuate substantially.

Capital loss

In addition to the potential for capital loss through falling share prices, if you own shares in a company that goes out of business, you will be last in the list of creditors to be paid out. You may only receive a portion of your original investment, or nothing at all. It is important that you research a company's business before investing in their shares.

Timing risk

Markets tend to follow cycles. Often after sharp rises in prices, some shares are susceptible to subsequent sharp falls, and prices may take time to recover. Different types of companies can follow different price cycles. Though past performance is not an indicator of future performance for share prices, it is important to understand the past price cycles of a company before investing.

Other risks of share investing include

Dividend risk – it's not compulsory for companies to pay dividends, and dividends can vary greatly from company to company, and year to year. Some companies which are currently paying dividends may not continue to pay them going forward.

Currency risk – for overseas investments or companies that have offshore operations, adverse moves in the exchange rate can reduce the value of your investment.

Poor investment decisions – there are many factors that influence share prices, and a lack of knowledge or research can lead to poor investment decisions. Ensure that you perform thorough research before investing in the share market.