It’s the big question. Is now the right time to buy shares? When you’re a first time investor, it can be hard to know if and when there’s a right time to invest. With the economy in distress, share prices are plummeting, which means there’s more chatter around investing than there has been for some time.
Information contained in this article is general in nature, should not be considered as financial advice, and does not suggest any level of certainty.
Why is everyone talking about investing in shares now?
The pandemic has impacted profits of almost every company in the world in some way. When companies lose money or have their growth performance impacted, their share values fall, which means a share that might have cost $100 in January could now be worth around $65.
This can happen at any time for any reason, but what’s different about right now is that it’s global. Share prices of hundreds of thousands of companies have fallen, so you could argue that it’s somewhat easier to find an investment with a good chance of recovery.
Why buy shares when the share market drops?
For newbie investors, it can feel counterintuitive. The market is dropping, the economy is struggling, nobody knows what’s going to happen. Why the heck would I invest?
The reason people invest when the market drops is because they get more shares for less money. If those shares recover and then continue on an upward trajectory, investors who bought when the market had dipped enjoy bigger returns.
For example, let’s say in January you wanted to invest $1000 in the share market, and the shares you wanted to buy were 40 cents a share. For your $1000, you’d end up with 2500 shares.
If by May, those shares dropped to 25 cents a share, and you invested the same $1000, you’ve got 4000 shares for the same money.
If over the next 3 years, those shares return to their original value of 40 cents per share, plus continue growing and in 3 more years reach 60 cents per share, your $1000 will look very different depending on when you bought.
The $1000 invested in January would be worth $1500, because you bought 2500 shares that are now worth 60 cents per share.
The $1000 invested in May would be worth $2400, because you bought 4000 shares that are now worth 60 cents per share.
That’s why market drops get the attention of investors.
Is now the right time for me to invest in shares?
The market has dropped, which means there are opportunities to invest if you are in a position to do so. By way of an example, Commonwealth Bank shares were at $92 in February, but is sitting at $63 today.
But…your decision to invest should first start with you and your financial position. Then you can start looking at the market.
The question you need to ask yourself first is do I actually have any money to invest?
To have money to invest, you need to have a surplus of money that you can reasonably kiss goodbye to for the foreseeable future. This is always true of investing, but even more so when you’re investing during a pandemic! That surplus doesn’t need to be a lot. Investing is no longer a game only the wealthy can play. It might be $500 or $5,000.
You need to have sufficient savings to cover yourself without needing to sell your shares to liquidate your investment.
If you invest your last $1000 because those 40 cents per share shares dropped to 25 cents per share, but then your car dies and you need that $1000 for repairs, you find yourself at the mercy of the market. Because you need to liquidate the shares, you have to sell at whatever price they’re at. If they dropped from 25 cents to 15 cents, you’ll lose money.
Don’t invest money unless you have sufficient savings first – and don’t invest money if you have substantial consumer debt. The rate of interest you’re paying on that debt will cancel out any returns you can expect to get from your shares for quite some time.
Know the risks of investing in shares
The examples I’ve used in this article are exactly that – examples. They illustrate what can happen if the share price drops, and if that same share price recovers. Unlike putting savings in a savings account, there are no guarantees. Share prices can drop to zero, which means you’ll either lose your investment all together, or you’ll scramble to sell before they fail completely and lose money by doing so.
There are higher risk investments and lower risk investments – the latter of which includes ETFs, which stands for Exchange Traded Funds and is basically a basket of shares from multiple companies. These still carry risks, but unlike investing in one company, you’re investing in multiple, which can deliver some level of offset risk, but that can mean with slower growth rates.
If you’re a beginner investor and want to get started with a small amount, micro-investing is a really good place to start. You can invest as little as $5, and learn how the market works with real money.
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