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Risky and yet so Very Rewarding

  01/11/10 07:24, by Len, Categories: Personal Financial Management, Investment Management

Source: Article by Thembisa Mapukata - an Old Mutual marketing manager

How and where to invest will be one of the most important decisions you can make this year. LET’S take a look at one of the key-building blocks of a healthy investment portfolio – equities.

Companies need money to grow. Instead of borrowing all their capital from lenders, companies can raise finance by issuing shares to investors. When you buy shares, you become eligible to receive part of the company’s profits in the form of dividends, which are often paid at six-monthly intervals, as cash or in the form of more shares.

Shareholders can sell their shares, hopefully at higher prices to make a profit.
The increase in the market value of shares makes up the remaining portion of the total return. Supply and demand, positive perceptions of the company’s performance, all influence share prices and dividends.

Why equities?

If you can’t afford the risk of losing some of your money in the short-term, you should avoid investing in shares. When companies have financial difficulties, share prices go down. When times are tough, companies may re-invest profits in the business instead of paying dividends.

Buying shares

Shares in public companies are traded on the Johannesburg Stock Exchange. You can buy through a stockbroker or online from a share trading website. If that sounds too hectic you can invest indirectly, through unit trusts or endowment plans. These investments pool funds from many investors and use the money to buy a range of listed shares, with the investments selected and managed by professional fund managers. You are allocated ‘units’. If the underlying shares perform well, your unit values increase.

Investing wisely

Investing in shares as part of an overall-balanced portfolio can prove to be rewarding if you have time and can handle risk. You can lower your overall risk by diversifying your portfolio. Ask a financial advisor to help you decide on the proper allocation. If you opt for equity investments, look for a fund manager with a good track record.

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