What is investing? And why do it?
Investing, at its core, is the act of putting money into financial schemes with the hope of them increasing in value over time, thus giving the investor a financial return or profit. While an investment could count as anything with the potential to increase in value over time (property, collectibles, merchandise) the most common and arguably easiest way to invest money is through buying and selling shares on the stock market.
In order to fund their operations, companies often issue shares (part-ownership of the company) onto the stock market (the Australian Securities Exchange [ASX] in Australia) through an Initial Public Offering (IPO), which can be bought by anyone. The price of the company’s shares (stock price), following the IPO is dictated by their supply and demand; that is, the price will increase with high demand and decrease when demand for the shares decreases.
Making Money Through Shares
Conventionally, upon buying shares in a company, an investor is hoping that the demand for said shares will increase at some time in the future, thus increasing the price that somebody is willing to pay for it on the stock market. The investor can then sell the share for a higher price than they bought it for, thus making a profit. However, investors have the potential to lose money if demand decreases for the shares they own, thus decreasing the price.
While an investor may see returns by timing the market and selling shares for higher than he/she bought them for, shares in some companies provide a secondary form of income. Some companies on the Australian Securities Exchange (ASX), mainly large companies such as Rio Tinto, allocate a portion of their profits to shareholders on a per-share basis in a payment known as a Dividend. While the amount of dividend paid per share is usually quite small, this may add up if an investor owns a significant amount of shares in a company or a number of shares in multiple dividend-paying companies, providing a small amount of supplementary income.
It is also possible to make money if the stock price falls by short-selling (shorting) shares. In order to short a stock, an investor will borrow shares in a company with an obligation to return them to their owner after a period of time. They then sell these shares on the open market in the hope that the stock price will fall, buying them back for a lower price than what they sold them for and thus, making a profit. However, as they are borrowing the shares and don’t actually own them, the investor must buy back the shares regardless of the price and thus, may lose money if the stock price rises rather than falls, making short-selling an especially risky method of investing if not done correctly.