Shares are riskier than other types of investments such as bonds and cash investments. If you own shares, you’re not guaranteed a return or capital gain, but they potentially offer a higher return, particularly over the long term.
What are shares?
When you buy shares, you're buying a small part of a company. You also get a share of the company’s profits.
You can buy shares directly or own them through a managed fund which pools many investors’ money.
A company’s share price depends on how investors perceive the company’s value. The share price takes into account the company’s profit, its potential for growth, and its return to shareholders.
When a company decides to give a share of profits to its shareholders, this payment is called a dividend. If a company decides it needs to reinvest profits in the business, they can either reduce the value of the dividend, or choose not to issue a dividend to shareholders in that financial year.
When a private company prepares to list its shares for trading in a licensed market such as the NZX, it makes what’s called an ‘initial public offering’ (IPO). This means it’s offering its shares for sale to the public for the first time.
It’s important you understand a company’s financial position before you decide to buy shares in an IPO. The share price may fall or rise once it’s publicly traded.
A company offering shares to the public must provide information to potential investors so they can make an informed investment decision. This information is provided in a product disclosure statement (PDS). This document explains how the investment works and gives a brief overview of the company.
You can find a summary view of a company’s financial position in the PDS under the heading ‘Selected financial information’.
Before you invest in a new share offer, read our guide to selected financial information.
Understand the risks
When you buy shares, you take the following risks:
- The value of your shares might fall. The company you’ve invested in could also perform poorly, or fail.
- Your shareholding may be reduced. This can happen when the company you’ve invested in offers to sell you new shares to raise money but you don’t take up the offer. It can also happen when the company raises capital using complex investments that can cause your initial investment to be sharply reduced if you don’t know what to do with them.
- The share price could stay weak for a long time if the company consistently disappoints investors. Dividends may also fall if profits fall, or the company decides to keep more of its profits to reinvest in the business.
Things to look out for
When you’re reading through the PDS, consider the following information:
Find out
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Why it matters
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| If the company’s shares will be listed or unlisted |
If a company’s listed, it lists its shares on a licensed financial product market like the exchange run by NZX Limited. This means both the company and the sharebroker must comply with the rules of the exchange. Unlisted shares can be harder to sell because they’re not on an exchange and there may not be an established market for their sales. |
| What products or services they offer |
A company’s products or services can give it a competitive advantage over other companies in the same market, and this helps protect and/or grow future earnings. |
| Key drivers of returns |
These help you understand how the company plans to grow its profits. |
| Key risks affecting the investment |
These help you understand what could affect a company’s profits. For example, a company’s risk will be high if it has only one major customer, or if it sells in only one market. A sharp rise or fall in the NZ dollar is another risk that can hurt profits. |
| Financial information about the company |
This helps you understand what debts or assets the company has. For information about what to look out for, read our guide to selected financial information. |
How to reduce risk
- Diversify – most investors should aim for a mix of investments to smooth out the ups and downs in value that typically happen.
- Invest for the long term – holding shares for the long term enables you to smooth out price fluctuations. If you buy shares with money you’re going to need soon, you take the risk of being forced to sell at a low price.
- Don’t try and time the market – no one can predict with certainty how a share will perform. Trying to pick a good time to buy or sell involves some luck, so make sure you’re fully informed about what you’re buying or selling, and why.
