Making the most of the sharemarket

The NZ Stock Exchange display board in the foyer of Quay Towers in central Auckland. Photo / Kenny Rodger

As part of Money Week 2013, we are running a series of articles offering basic investment advice, written by Sorted.org.nz.

Earlier this year 113,000 Kiwis bought shares in Mighty River Power. Those investors now own a small part of the company and will share in any profit it makes. However, investors in Mighty River Power will also be aware of shares' potential to drop in value - MRP shares listed at $2.50 per share and are currently trading at around $2.24

This may sound like an intimidating prospect, but the flipside of risk is reward, and if you do your homework, investing in shares can be a good way to grow your money and accumulate wealth for your retirement. Consider the share market darling Xero, whose shares listed at $1 in 2007 and are currently trading at close to $15.

Shares, also called stocks, equities or securities, are mostly bought and sold on stock exchanges such as the NZX. You can buy or sell shares directly through a sharebroker registered with the NZX or indirectly through a managed fund and a fund manager.

By 2033 a typical outcome would fall within the green and blue areas.

The graph above shows historical and projected future returns on an initial investment in 1993 of $10,000. You can see how the market's ups and downs affect the value of the investment.

The nature and volatility of the sharemarket means that shares may not be for everyone, and it will depend on what type of investor you are: your attitude to risk, your capacity to invest, and how long you want to invest for.

In New Zealand, shares make good investments for those with a long-term timeframe and goal, such as saving for retirement. Investing for a period greater than 10 years will ensure your investments have time to ride out the volatile periods.

Sorted's Investment planner recommends that a balanced investor's portfolio include 41 per cent shares. This amount increases to 80 per cent for an aggressive investor and drops right back to 14 per cent for a risk-averse defensive investor. Compared to the projected returns on cash, bonds and property, nothing compares to shares, but it pays to keep in mind the associated risks and talk to a professional before making any investment decisions.