How investing in shares works (2024)

Shares are among the riskiest of investments, yet they are also one of the best ways to grow money, especially over the long term.

A share (sometimes called a stock, equity or security) is a slice of a company. These days on apps like Sharesies or Hatch you can even buy ‘fractionalised’ shares, which are ‘slices of a slice’ of a company. Owning these units, no matter how small, means that you own part of that company and can enjoy a portion of the profits it makes.

When the company does well, you do too, depending on how many shares you own. If it distributes its profits by paying a dividend, you get some of that. Even if it doesn’t pay a dividend, you can still look forward to a quality company becoming more valuable and your shares being worth more in time if the share price climbs.

Taking on more risk with shares generally means the potential for higher returns. Think of those returns as you getting paid for taking on that higher risk.

In this guide

How does investing in shares work?

Companies offer shares in order to raise money and grow. Many companies start out as an entrepreneur’s idea, often with humble beginnings in a garage, apartment or dorm room (think Facebook, now Meta). To make the jump from an idea to a fully operating company, they need massive amounts of money (capital), so they sell shares – essentially sharing the ownership of their business with investors.

Share prices – how much investors are willing to pay for them – rise and fall throughout a trading day. When they go up above the price you paid for them, you make money when you sell. Prices depend on how investors think about the company and its outlook, and they typically look at:

• The company’s profit
• Its dividends
• Its potential to grow more
• The risks it’s facing
• How investors collectively feel about it

Shares can rise and fall in value and be a bit like a rollercoaster, so generally they’re better as a long-term investment (at least a decade). That way you can ride out the typical ups and downs in the sharemarket.

Are shares right for you?

The sharemarket can be risky, so you need to be prepared. If you are going to get on a rollercoaster, you make the choice ahead of time – it’s dangerous to try to get off halfway. The ups and downs of the sharemarket can be steep, since it tends to grow steadily and then could fall suddenly. So you’ll need to be comfortable riding the ups and the downs (and not lose sleep when the market is falling and your shares are worth less).

Before you invest in shares, ask yourself, what am I investing for? If your goals are long term – at least a decade away – shares can be a good option. You don’t want to be forced to sell your shares (or any investment for that matter) in a hurry.

If you are picking and trading shares in individual companies, you’ll need to be ready to spend time researching them, including following the news, reading their reports or even attending their annual meetings. If not, you may want to leave it to professional fund managers.

A great way to find out if shares are right for you is to understand your investor profile and see how they fit into your overall mix of investments. Here’s our investor profiler to help.

How much does it cost to invest in shares?

There are always fees that come with investing, as various services ‘clip the ticket’ while you’re buying and selling shares. These can typically be either a flat fee or a charge based on the percentage of your funds being invested.

For financial advisers and brokers, there will be a minimum brokerage fee and possibly a percentage fee over a certain minimum.

Active managers tend to be more expensive, which reflects the additional time and research they put in when selecting shares. Passive managers that follow an index of shares are more on autopilot and tend to charge less. As always, you can expect to pay more if the broker or fund manager is offering additional services such as financial advice or company research.