01 | 05
Investors refer to the share markets in a bunch of different ways
The second rule of investing: Don’t let the jargon put you off. If you were inclined towards conspiracy theories, you’d almost believe the industry has created a world of confusion and mystery on purpose to keep regular people out. But all you need to know is that when you strip back the jargon, the share markets operate in a very similar way to how you buy and sell stuff on an online marketplace (like eBay or Trade Me).
Here’s that jargon again:
- Stock exchange: A marketplace to buy and sell shares in public companies. AKA share market, exchange.
- Private company: A company that hand picks its investors (i.e., your local takeaway shop, but there’s no limit on the size of a privately held company). Virtually every company starts by being privately held.
- Public company: A company that can be invested in by any member of the public (generally through the share markets). A company usually ‘goes public’ by listing on a share market.
- Stocks: When a company sells a portion of its ownership, it does so by issuing ‘stock’, a finance term people use interchangeably with ‘company’ when it comes to investing (i.e., “I’m investing in Zoom” means the same thing as “I’m buying Zoom stock”).
- Share: Stock in a company is divided up into shares, which you can then buy (i.e., “one share of Zoom stock”).
02 | 05
Introducing exchange-traded funds
No! It’s not an Emissions Trading Scheme (damn acronyms)! An ETF is an exchange-traded fund. As the name suggests, you invest your money into a fund, similar to how it works with KiwiSaver. The differences are, rather than investing into the fund directly from your pay packet, you buy shares in a fund through the share market (or exchange); oh, and you have the flexibility to sell your shares and get your money out whenever you like.
Tell me more!
Think of each ETF as a shipping container full of investments. You invest in one by buying a share in the container and then you own a tiny slice of every investment in it.
ETFs are taking over the investing world
In the past few years, the world has gone through an ETF revolution and now about 50% of the entire US share markets are owned by these funds.
03 | 05
Never invest out of FOMO
The third rule of investing is never to be swayed by the masses! However, in this case, there’s some solid reasons why ETFs are popular. This one involves a bit more reading, but we promise it’s worth knowing this stuff!
Benefit 1: Research
If researching and picking individual companies feels like a lot of work, ETFs may be a good option. When you invest in funds, you can invest in a lot of companies within an industry or theme without having to research and handpick each one yourself.
Benefit 2: Risk
Investing in an individual company is like putting all your eggs in one basket. When you buy shares in an ETF, your money is automatically spread over tens, or even hundreds, of companies (this is what investors call ‘diversification’). You don’t get crazy returns from one company that grows wildly, but on the flip side, if one of hundreds of companies fails, you aren't as negatively impacted (aka the first rule of investing: Balance risk and return).
Benefit 3: Fees
Every fund has annual fees (once again, think KiwiSaver). You don’t actually pay them, they’re just reflected in your returns each year. ETFs let the markets do the talking. Which means low fees. We’ll talk more about fees later, they are important.
Benefit 4: Choice
There are over 1,200 ETFs available through Hatch. More funds means more choice, but anyone who’s tried to compare 30 odd KiwiSaver funds may already be feeling a cold sweat about making a decision. The good news is that ETFs can be broken down into a few categories:
- Broad: These ETFs aim to invest in most or all the companies in an entire market, for example: 'the largest 500 companies on the US share markets', or 'the 10 companies with the highest dividends on the NZX'. These funds are often considered a ‘great to have’ because by investing so broadly, they give you high diversification and therefore, lower risk.
- Trends/industries: If you are into anything from solving climate change, to robotics, to clean energy, to female leadership or property, there’s an ETF or ten that invest solely in companies related to those themes. These are less diversified and because trends go in and out of favour, no one knows how profitable emerging industries will wind up being (hello Cannabis!). However, because you are investing in an entire industry, not just one company in it, they are still considered a good option for diversification.
- Other: ETFs are getting pretty sophisticated these days and there’s a crazy number of options. Almost every niche investment strategy or theme has an ETF, but they’re not super relevant when you are starting out. You can safely ignore these for now.
04 | 05
A good investor is a diversified one
As we’ve learned, putting all your eggs in one basket (AKA one company), increases the risk of big fluctuations in the value of your investment in the long run, and that you might end up with less money than you started with. An easy rule to remember is you should try not to have more than 5% of your money in one company (not all investors stick to this, we’ll talk more about different strategies later!)
Investing in companies is a great way to learn
Buying a share means you own a very small part of a company. For example, buying one Shopify share will cost you around $XX, and you now own a teeny slice of the company. Owning that share is a great way to start learning investment basics. Monitor the share price over time and look at what impacts it (news, annual reports, industry or regulation changes etc etc).
However, company shares can be expensive
In the US, most publicly listed companies (companies you can invest in through the share markets) are very expensive to buy. Amazon, for example, has traded over $2,000 per share. For most new investors $2,000 is more than their entire investment budget, making it hard to stick to the 5% rule.
But there is a way…
* Companies referred to in this course are referred to by way of example or illustration only. We don’t provide any opinion or recommendation on the buying or selling of any financial products.
05 | 05
Now you can invest tiny amounts in shares
Hatch (and other investment platforms) allows you to buy a fraction of a share, so you invest as much or as little as you like. This means you could invest $200 in Amazon and get ~0.1 shares.
Mix and match your investments
Once again, it’s not all or nothing! Many investors invest the bulk of their money in a couple of low risk, broad ETFs, and then put small amounts in a few companies. Because it’s a small portion of their money, they are more comfortable with the ups and downs and the chance the company could decrease in value over time.
Decide on your initial investment amount
On day one of this course, you identified how much of your savings you’ve put aside for the long term. Today could be the day you consider how much (if any) of those savings you're prepared to invest in the share markets. Remember, it doesn’t have to be a large amount and should be what you are comfortable with. Many investors start with around $100–$500.
Decide on your regular contribution
Going forward, every time you add money to your savings, you can think about carving out a portion to add to your investments. Remember this is money you wont need for a long time, so start well within your comfort zone, you can always increase it as you go.
If you've come up with your two amounts, write these down. They might be useful later.