Many readers have been asking the question, “Should I invest in shares as a way of making money work for me?” My answer has been both “Yes” and “No”. Yes, it is a way of making money work for you; no, because most readers are probably not ready yet.
Before I explain why I think most readers of this column may not be ready to invest in shares, let me briefly explain what the share or stock market is. Shares are basically parts of a company which the owners of the company make available to members of the public as a way of raising funds to either start or expand the operations of the company. When you buy shares, you become a shareholder, or part-owner of the company. A stock market is where such shares are bought and sold.
You can buy shares when a company first sells them. This is called an Initial Public Offer (IPO). can also buy shares when those who bought during the IPO decide to sell their shares for whatever reason.
Another point that needs to be made is that you can buy and sell only through stock brokers. There are two such companies in PNG. They are BSP Capital Ltd and Kina Securities Ltd.
You can make money in two ways. Firstly, by buying and holding shares. When the company makes money (a profit) and the directors decide to pay the shareholders, you get your portion depending on the declared dividend rate and number of shares you hold in the company. Dividends are paid periodically (quarterly, half-yearly or yearly). When you buy and hold for dividends, you are an investor.
The second way is by buying and selling. You buy shares when prices are low, and sell when they are high. For instance, you may decide to buy a certain number of shares of a particular company when the price is K1.00 per share, and sell when the price rises to K2.00 per share. Your profit (also called a capital gain) is K1.00 per share minus transaction costs. When you buy and sell, you are a share trader. You may also be regarded as a speculator if you buy shares with the expectation and intention of selling them when prices will rise.
So, yes, you can make money by buying and holding shares or by buying and selling.
Now, why do I think most readers of this column are not ready? Two reasons are as follows:
1. The share market is risky. You can make money, but you can also lose money if the company does not make money or the share price falls. You don’t have any control over what happens to your shares, because share prices are driven by the market forces of supply and demand. A large portion of the risk is also associated with ignorance of the market and how it works. My assessment is that most people in PNG have little if any knowledge of the stock market.
2. To really make money, you must hold a significant number of shares. You can make small amounts by investing small amounts, but we are talking about making money work. The majority of readers of this column would not have the kind of money that is required to make real money.
My advice to readers is usually that they need to learn about the share market first. In other words, people need to invest in themselves first before they consider investing their money in the share market. They can get educated by reading books, attending seminars, and even asking people who know about the subject.
Secondly, I advice is to start a business first. A business presents you the opportunity to make the most money. A business is essentially a money printing system. The business may fail, but it can also succeed. When it fails, you lose their investment. This is always possible. But it is also possible that the business really takes off and makes a lot of money for you.
When the business makes money, my advice is for you to invest in rental properties. When you have a firm asset base of several properties which are generating income, you can start investing in the share market. Hopefully by now you would have educated yourself as well, so you can make real money investing or trading shares.
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