Types of investments available

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 finance 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:

1. Stock exchange: A marketplace to buy and sell shares in public companies. AKA share market, exchange.
2. 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.
3. 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.
4. 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”).
5. Share: Stock in a company is divided up into shares, which you can then buy (i.e., “one share of Zoom stock”).

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.

Never invest out of 'fear of missing out'

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 exchange traded 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 1,900 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:

1. 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. 
2. 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 that invests 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. However, because you are investing in an entire industry, not just one company in it, they are still considered an option for diversification.
3. 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 choose to safely ignore these for now.