Investing is when you use your savings to try to make a profit. If you have money in a savings account that pays interest or with a superannuation fund, you are already investing!
Investing allows you to benefit from ‘compound interest’.
Types of investments
Different types of investments have different benefits and carry higher or lower risks of losing your money. Generally, the higher the expected return, the higher the risk of losing your money.
Lower risk investments include cash and fixed interest investments and tend to be used for short term investing of up to 3 years. With cash investments, such as money in your savings account, you earn a return by receiving interest payments. With fixed interest investments, such as term deposits, you deposit money with a bank for a fixed period of time. You are then paid interest on your money at a set rate.
Shares tend to be higher risk investments and, in return, offer a potentially higher return. Because prices can move up and down a lot in the short term, they are typically held onto for a longer timeframe, such as at least five years.
Many people invest in property. This includes buying a house to live in, or renting it out and getting rental income.
Deciding how to invest
Before investing, take some time to think about what you want to achieve from investing (your goals) and how much risk you are willing to take on. Ask yourself how you would feel if the value of your investments fell say 20% overnight? If it would cause you stress and to withdraw your money, high risk investments probably aren’t best for you.
You should also consider for how long you’re willing to part with your money.
With all investments, you must be prepared to lose the money that you put in. This can be due to your investment falling in value or not performing how you expected.
You may have heard the saying, ‘don’t put all of your eggs in one basket’? This is about diversification, which means splitting up your savings into different types of investments so you spread the risk. This way if one type of investment falls in value, or a company you’ve invested in collapses, you won’t lose all your money.
With any investment, it’s a good idea to read the Product Disclosure Statement so you know what you’re buying.
Investing in the share market
Investments like shares and exchange traded funds (or ‘ETFs’) are bought and sold via the share market. In Australia, the largest share market is called the Australian Securities Exchange (ASX).
You need to be at least 18 to buy shares on the share market. If you’re planning to invest in the share market in the future, there are a few things you need to think about.
You’ll need a stockbroker. Most banks offer a broker service and there are also licensed people that do this too. Signing up to a broker gives you access to a special bank account and access to a platform to buy shares from the share market.
Check if you need a minimum amount to start investing. Most brokers require a minimum amount saved up before you start, plus any broker fees. These fees vary, usually around $20 per transaction. More expensive brokers usually give you information and analysis to help you choose what to buy.
The Australian Government website Moneysmart explains how investing works, including buying and selling shares:
Keep in mind that you may need to pay tax on any profits that you make from your investment.
The Australian Taxation Office (ATO) website provides more information about paying tax on investment income:
Exchange Traded Funds (ETFs) and managed funds
ETFs and managed funds can be a low-cost way to invest. They are also a good way to diversify your investments.
You can buy an ETF the same way as you buy shares on the share market. The difference is that you are buying a basket of shares, for example a range of Australian or international companies.
Managed funds are not bought via the share market. Instead you use a professional fund manager that is responsible for making and managing the investment on your behalf.
Both types of funds charge fees. While ETFs do not charge fees directly to investors, their price typically includes a management fee. This can vary between ETFs from as low at 0.1% to 1% or more.
Before you invest you should check out the Product Disclosure Statement of the ETF or managed fund for information about its fees and costs and shop around for the best product for you.
The Australian Government website Moneysmart provides more information about ETFs and managed funds:
Micro-investing means making small and irregular investments, rather than buying shares with a lump sum, for example, rounding up your purchases to invest your spare change. This can be a convenient and easy way to start investing. You are usually charged a fixed account management fee and it may also cost you to withdraw your money.
Crypto-assets, such as cryptocurrencies, coins or tokens, are digital assets. This means that unlike investing in cash, they do not exist physically as coins or notes. Crypto-assets are a high-risk investment.
As with any investment, you must be prepared to lose what you put in when investing in crypto-assets.
People can buy and sell crypto-assets through a crypto-asset trading platform. Crypto-assets are kept in a unique digital wallet or hardware wallet. A user’s wallet has a set of private keys (unique codes) that is used to send or receive crypto-assets to the wallet. If you lose your private keys, you lose access to your crypto-assets.
Crypto-assets are most commonly used as a speculative investment.
Buying crypto-assets involves many high risks, such as:
- extreme price volatility - the price of a crypto-asset can move up or down by massive amounts within a short time-frame
- not being regulated, and therefore you may not be protected if the platform you buy your crypto‑asset from fails or is hacked
- it is very complex and difficult to understand, and there is no requirement for a Product Disclosure Statement that explains the product in one place and in plain English
- scammers trying to trick people into investing in fake opportunities to buy crypto‑assets
- it is not considered legal money in Australia and therefore not widely accepted as payment for goods and services.
The Australian Government website Moneysmart explains more about crypto-assets:
The Australian Government website Moneysmart also has an investor toolkit with practical information to help you with investing:
Tips for teens/adults
A great way to learn more about investing is checking your superannuation account. Most superannuation fund websites let you keep track of your current balance and see where the superannuation fund has invested your money on your behalf.
The Sharemarket Game on the ASX website is a fun way to help you learn about investing in the share market by creating a pretend portfolio, trading your shares and testing your strategies. Check it out at: ASX Sharemarket Game.
Ask an adult whether they have shares and in which companies. Get them to tell you about how the price of these shares has changed over time and if they have learned any lessons from investing.
Before you start investing, review your budget and make sure you have enough money saved to cover things you need to buy and any expected future expenses or purchases. This way if your investments do not perform as well as expected, you still have some money to buy the things you need.
Particularly through social media, there are lots of people willing to share their views and give you information about investing, but most are not qualified financial advisers. Make sure you check that you’re relying on a credible source you can trust.
Before your teen starts investing, help them to come up with a clear plan for their investment. Some questions you can ask them are: What do they want to achieve? How much of their money are they willing to lose (risk appetite)? How long do they expect it will take them to make a profit?
If your teen has any debts or owes any money, encourage them to pay this off before investing. Ask if they have enough savings outside their investments to cover any future expenses. This way, they won’t have to sell an investment quickly if they are desperate for cash.
Talk to them about the importance of diversifying their investments – spreading their money across and within asset classes, like cash and shares, to help lower the risk they will lose all their money.