Investing, simply put, is a way to try and make money. It's slightly different to saving, as you have to spend your money instead of keeping it safe in the bank. To invest, you buy into either a financial scheme, shares, property or another type of investment with the expectation of receiving more money back. The intention is to spend on something that will grow in value, and then you financially benefit from said growth. 

Investing is a constantly changing terrain, especially as technology evolves, so it can be hard to wrap your head around it. Luckily, there are tried and tested methods of 'safe' investing that are highly likely to make you money. KiwiSaver, our voluntary savings and investment system for buying your first home or retiring, is one of the safer methods of investing. 

When was investing introduced?

Although investing may seem like a modern concept in the complexity of its set-up, the current global investment structure can be sourced back to the 1600s. The first modern form of the Stock Exchange can be traced back to 1602, with the release of the Amsterdam Stock Exchange. The oldest form of investing framework found was in the Code of Hammurabi around 1700 BC.

How does investing work?

People invest with the intention to make a profit. Investing works on the basis that their selected investment provides monetary returns. Common investment terms are volatility and returns, as these are two sides of the same coin. The more volatility there is in an investment, the more returns you would expect to receive over the long term. However, high volatility also comes with an increased risk factor and it also may cause you to lose money.

Investors need to take into account multiple factors when deciding if the investment has growth potential. Researching your next investment should involve looking at the historical returns, competitors, public opinion, external factors, and calculations. A comprehensive profile on how the investment has performed in the past will help you decide if it's right for your future.

How do I invest?

There are many ways for new investors to join the stock exchange. Years ago, you would have needed to have extensive financial knowledge or seek out a financial adviser to begin your investing journey. However, new NZ apps such as Sharesies and other micro-investing platforms are available for nearly anyone to sign up to and have a user-friendly interface. Platforms like these can be used as an introduction to the basics of investing. Sharesies allow you to upload money into the app via direct debit or bank transfer. You can then use your 'wallet' to invest in whichever companies, portfolios or more. There are NZ and global investments available. 

Most people invest to see a higher return on their assets than what they would get from just saving the same amount of money. Since inflation is a given with most currencies as well, investors want to receive returns higher than they would by just keeping it in a bank. This basically means that you just grow the money you already have. Below, we see the difference between saving with and without inflation. This shows why people tend to use investments instead of just saving.

Saving with Inflation:

Saving without Inflation:

Benefits of investing

There are many benefits for those looking into investing. Potential long-term returns are one mentioned previously. Although cash assets may be safe and secure, you would be unlikely to see substantial long-term returns. You tend to find higher returns over time with more volatile investments.

Other benefits include outperforming inflation. Once your investment reaches a certain amount, you can use the redraws of it as your income. You can also tailor your investments to suit your current lifestyle and goals, to increase or decrease the monetary volatility.

There are many ways for you to invest your money, each coming with its own volatility and returns. This includes savings accounts, term deposits, bonds, shares, property, and your KiwiSaver account. Some other things you can invest in that you might not know about are commodities such as gold, oil, currency, and Derivatives. Each can have its own positives and negatives, such as the time frame of when to buy and sell, how much research is required, and the possible gains and losses.

What are Bonds?

Bonds are considered fixed income instruments that can be thought of as an I.O.U between two parties. This is a transaction between the lender and borrower. Bonds are generally used by companies, states, municipalities, and sovereign governments to finance projects and operations. The role of the bondholder is to be the debt holder/creditor of the issuer and receive payments (with interest) and is required to be paid back within a certain time frame.

Bonds are generally low volatility investments as they typically pay a fixed amount each time, so you know what you're getting. This also means there is not much additional scope for profit outside of the set terms.

What are Stocks?

Stocks can be thought of as a portion of ownership of a company. When companies sell stocks, they are inviting investors to purchase a part of the company. This makes them partial owners of the company. Stock can be bought through stockbrokers or through investing platforms, such as Sharesies. Another way you may get the opportunities to buy them is if you work for a company that offers their employees the opportunity to purchase shares in their business.

Equity is another name for stocks that you may also hear as an investor. Also, remember that companies can issue bonds to raise capital. But purchasing bonds makes you a creditor, not an owner. Remember that owning shares doesn’t give you a say in what the business does, but shows that you trust the company with what they are doing. If you do not agree with them, you can always take your equity and look for a new place for your investments.

What are ETFs?

ETFs’ (Exchange Traded Funds) are a type of security that tracks an index, sector, commodity, or another asset. It can be thought of as a group of multiple investments in one, and it can include stocks, commodities, bonds, or a mixture of all of these. 

It can be traded just like stocks, and its price can fluctuate throughout the day. This is because it is bought and sold as the day goes on, unlike mutual funds that are traded at the end of the day when the market closes.

What are Cryptocurrencies?

You may have heard about cryptocurrencies lately and the hype behind them. Cryptocurrencies are digital or virtual currencies that are secured by cryptography, meaning that they are impossible to counterfeit or double-spend. Many people believe that cryptocurrencies will be the currency of the future, as it is a decentralized network based on block-chain technology. This basically means that it isn't controlled by any one person. People invest by purchasing these cryptocurrencies with their own money, this can be thought of as trading currencies between countries.

You may have heard of Bitcoin and its rapid growth over the past decade. Cryptocurrencies currently aren’t used much in most countries for purchasing apart from a few countries, but are bought for their intrinsic value.

Day Trading

As the name indicates, day trading refers to the practice of buying and selling a security within a single day. This can be used in almost any marketplace, but it is mostly used in the foreign exchange and stock market. Day trading requires a vast amount of knowledge on financial literacy and having access to disposable money. This comes with a high amount of volatility, but for those that know what they're doing, can reap serious returns. But with the opportunities of great returns, comes the chance of also losing money as well.

For day trading stocks, the best times to trade are usually two hours after opening, and before closing. This is when the stocks are the most volatile. 

The foreign exchange market is open 24/7 and can be used to trade at any time as well.

According to FMA and Colmar Brunton, who surveyed 1,000 New Zealanders on their investments, these are the five most popular schemes:

• KiwiSaver 67%
• Life Insurance 37%
• Alternative superannuation 14%
• Managed funds or unit trusts 7%
• Portfolio managed by a professional investment advisor 5%

As we can see, only a small margin of people used their assets for investments other than KiwiSaver.

How do I decide which investments to choose?

When looking into investments, looking into historical data is the safest method to get an idea of how it will perform in the future. If you are thinking about managing it yourself, try to limit your investments to approximately 20 to 30 variations. This will also keep your investments diversified while also being manageable. 

Are returns on my investments guaranteed?

Profits are never guaranteed, but over the long term, you should expect to see returns on your investments. Generally speaking, if the investments are more volatile, the longer you'll need to hold them to receive returns. If you decide on investing in these higher volatility investments, remember that even if they do fall, they will most likely return and grow more in the future. So try not to panic switch if you start seeing them drop because it should balance out in the long term.  As we can see below of the past five years, if you invested in the NZX 50 index your returns would be upwards of 80%. 

How to diversify my investments

When you're first looking into investing, you might just want to stick with whatever company or ETFs is doing best at the time. But as the saying goes, you can’t put all your eggs in one basket. Having all your assets in one stock may lead to a good return for you. However, if that stock somehow meets misfortune and drops by a large margin, this will also lead to you losing a substantial amount on your assets.

By diversifying your assets into 20 or 30 investments, you can have some cushioning if some shares have a drop, as it would be outweighed by the others doing well. Having shares in multiple sectors allows them to not be affected by similar external factors. By only having 20 to 30 investments, it also allows you to manage them with some ease as well instead of having too many and not being able to keep track of them.

Am I taxed on Investments?

Yes, any income from your savings and investments are taxed, even if they are offshore investments. This only includes the returns themselves and not the principal investment amount.

Fees that you may need to pay.

Depending on whom you are investing with, fees vary. These are often referred to as brokerage fees. Sharesies for example, charge 0.5% on amounts below $3,000, and 0.1% on amounts above $3,000. For Sharesies, these fees apply when you buy or sell companies or ETFs (exchange-traded funds). 

Brokers are people or organizations that arrange the transactions to buy or sell the companies or ETFs on your behalf, then gain the commission when the deal is executed.

How to check on how my investments are performing

When checking on the performance of your stocks and investments, looking through the exchange market is probably the simplest way. The New Zealand Exchange (NZX) website allows you to keep up to date with share prices, dividend payouts and the S&P 500. There are similar websites that also provide information on performances such as Morningstar, that publish reports each quarter.

When should I sell my investments?

For most, knowing when to sell a stock can be a lot harder than the decision to buy one. Generally speaking, there are three reasons why someone would sell. One is that the purchase was a mistake, the price has risen a lot and you want to cash in, or if the current price is no longer supported by fundamentals.