Investing Basics
Welcome to NZX's guide to the basics of investing. This guide is designed to assist first-time investors in understanding the basic terminology and concepts of investing in the sharemarket.
At the end of each page we've provided a PDF version which you can download and print.
Note: Investing Basics is provided for information purposes only and is not intended to be used as investment advice. If you are interested in buying securities listed on NZX's markets, please contact an accredited NZX Advisor who is trained to give you professional advice.
Introduction
The basic idea behind investment is simple – use your money to make more money.
The money you invest in securities (shares issued by companies, debt securities and other investment units) is called "capital" and the money created is the "return on investment". With investment in shares, the return comes in two forms – capital gain and dividend income.
Capital gain: Capital gain comes from increasing share prices. When investors buy shares, they want the price of those shares in the market to be higher in the future. The higher the future prices, the bigger the capital gain for investors. Capital gain can occur rapidly - in days or even hours when share prices are volatile - or slowly.
Prices rise for many reasons but most fundamentally they rise because the outlook for a company's future profitability is improving. The biggest and most obtainable capital gains come from the shares of companies that grow and increase their profits over time.
Capital losses occur too, and sometimes very rapidly. When a company's profitability is declining or its outlook is poor, the share price will probably fall and shareholders lose.
Capital gains become a cash return on investment when investors sell their shares - they get back their capital plus an amount accrued because of the higher selling price.
Dividend income: Companies often pay dividends out of their profits. Dividends are a means of sharing the money made by companies with their owners. Just as property owners receive return in the form of rent from their tenants, share owners receive dividends as regular income.
Shareholders in many companies receive dividends twice a year. New Zealand has one of the highest levels of return from dividends in the world.
When the amount paid out is high, dividends can be a big part of total investment returns since companies are retaining less money to reinvest in the business to grow potential future profits. On the other hand, some companies pay no dividends and keep profits to help fund growth in their business.
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