Investing is a great way to build your wealth over time, but before you jump in, it’s important you understand how investments work and whether the shares you’re thinking of buying are a good investment for you.
These are the types of questions you should ask yourself when you’re doing your due diligence, or research.
Will the investment earn an income?
If you’re buying shares and want a regular dividend payment for instance, then you’ll need to check the company’s policy – not all companies pay dividends, even when they are doing well. It’s also worth looking at how much the company has paid in dividends in recent years to see if it has a good track record.
Look into managed funds
If you decide to invest in a managed fund, you should check its product disclosure statement (PDS) which sets out how its investment funds are spread across different types of investments, as well as its investment strategy and the level of risk associated with the fund.
Do you understand the company you’re investing in?
Work out what a company does and how it makes money. It’s also useful to check out its track record for delivering on its business strategies as well as the experience of its leadership team. This kind of information can help you decide whether you think you can trust the company to increase the value of your investment. You can find this information in company annual reports.
Check out the risks the company has identified and how well it is currently performing. Again, its annual reports can help with this, while recent Media Releases or Market Announcements to the NZX will cover any significant plans - or risks that might compromise their plans, for example a downgrading of their profit forecasts. Companies listed on the NZX will post these announcements on their own and NZX websites.
If you are buying shares in a company that is about to list its shares on the NZX for the first time (an Initial Public Offering IPO), you should review the company’s product disclosure statement which provides all relevant information for investors. Be wary of taking recommendations from friends or social media forums. See more about getting financial advice.
Ask yourself, Is the share price reasonable?
If you’re choosing between two or more shares and want to work out which is better value for money, valuation ratios and multiples can be handy if used carefully. Our guide to valuation ratios explains the main ratios and multiples you might want to consider.
What fees or costs are involved?
What will it cost to invest? What are the fees or broking costs? Remember fees and costs reduce your possible return.
How can I get my money back?
Could you sell your shares or withdraw from your managed fund if you need your money quickly? This is known as “liquidity”. In general, listed shares are highly liquid as they are traded daily on a listed exchange which matches buyers and sellers.
Is it a legitimate offer?
Many people have been caught out buying shares that don’t exist, sometimes through so called ‘pre-IPO’ offers. Remember that in New Zealand it’s illegal to sell financial products through a cold call or other unsolicited communication.
You should ignore any call, letter or email from a stranger about any opportunity to invest.
We have created some simple guides for investors on investments such as managed funds, shares and bonds.