Why Invest In The Australian Stock Market (ASX)

Opportunities to get rich have always been readily available.

“Nobody became a millionaire just by keeping their money deposited into bank accounts.”

This is a statement many investors have been known to flaunt when they are questioned over their investments and risks that they are willing to take.

Opportunities to get rich have always been readily available

Historically, real estate and equity investments have proven to be high-income generating returns.

While the real-estate business, if undertaken for rental incomes, proves to be a considerably stable income, it offers lower capital gains in comparison to high-growth equity investments.

Equity investments tend to vary from case to case. If there are large groups or institutional investors, they may have access to private equity placements. But in cases where investors are not that strong and may not be looking to take higher exposure into a single equity, they can look forward to building up a portfolio of diversified stocks which can be purchased through the stock exchange.

According to the “ASX Australian Investor Study 2017” conducted by Deloitte in 2017, 37% of the adult Australian population owned stocks listed on the stock market. This equated to 6.9million Australians having ownership investments either directly or indirectly into their portfolios.

Since then, the percentage of the population investing in the Australian Stock market has continued to increase with investors as well as traders, coming to join the stock market.

In the last decade, higher numbers of younger people have been investing. This is largely thought to be due to the technological resources and advancements within the industry.

According to the report, Australian investors are known to focus on long-term investments, but their aims may differ from one investor to the next. These aims can be categorised into “next-generation” (holders for life), “wealth accumulators” (buyers of every pressure), “retirees” (looking for income post-retirement) and “non-investors” (speculators) where the mix of investment includes 44% of holding cash-savings, 31% holding shares, 25% holding investment properties and 22% holding other on-exchange investments.

Why invest in the stock market?

Stock markets are platforms that provide a way for companies to raise capital for themselves. This is critical to the economic growth of the country. For investors, a stock market is a place to buy, sell and trade securities or related options where investment into stocks (also referred to as equities) is a representation of fraction-based ownership into the listed company.

People invest in the stock market with an aim of generating wealth for themselves, either through potential capital gains or dividend incomes, or a combination of both over time.

To note an example, an Australian stock under the title Northern Start (NST) stood out as the best performer of the last decade where a $1,000 investment into this stock in 2009 would have transformed into a whopping $332,000 in early 2019. That’s a 33,000% return in just one decade!

The Australian stock market

Australia’s stock market is ranked 8th in the global equity markets. It is considered to be the second largest in Asia with over $1.2 trillion in market capitalisation and average daily trading on the stock exchange of over $5 billion.

Although the history of the Australian stock market dates back to as far as 1788, the incorporation of the exchange as it is today came into being in 1987. Currently it has grown to be among the top exchanges globally and has over 2,200 listings and 6.7 million market participants who own shares.

In the past, the Australian stock market has hit an All-Time High (ATH) of $1.9 trillion in market capitalization!

Available investment opportunities in the Australian stock market

Unlike other Asian under-developed or developing stock markets, the Australian stock market remains among the leading markets and offers a range of products for market participants to trade across. These include:

  • Stock ownership by purchasing shares directly
  • Bonds ownership through purchasing listed bonds on the exchange
  • Hybrid securities which offer a combination of debt and equity security
  • Index-tracking exchange-traded-funds (ETFs)
  • Investment into mutual funds or managed funds
  • Index related derivatives along with interest-rate derivates, grain derivatives, etc.
  • Options, warrants and forward contracts
  • Market making arrangements, over-the-counter arrangements

The advantages and disadvantages of investing in the stock market

There are multiple advantages of investing in the stock market:

  • Opportunities to make gains through capital gains and dividend income
  • Diversifying even a smaller amount that an investor is looking forward to investing
  • High liquidity available if the market participants are willing to purchase or sell shares
  • Highly regulated industry offering a safe environment for investors
  • Potential tax incentives on investments

However, there are risks involved with investing in stock markets which do not just relate to the Australian stock exchange but apply universally. These include:

Market risk: The overall market sentiments and performance may impact the performance of shares that an investor owns.

Inflation risk: Changes in inflation may cause changes to occur in regard to the performance of stocks.

Credit risk: Owners of stock are considered to be the real owners, hence last in the line of creditors if the company fails to perform. In a situation where a company is winding up, there is a possibility that the share owners might not be paid at all.

Unexpected events: Any catastrophic events that are out of the control of market participants including media announcements, changes in the regulatory environment and natural or man-made disasters may seriously affect the share prices on the stock exchange. This may also lead to price changes contrary to the expectations of the investor, resulting into a loss.

Conclusion

Given that market participants and investors understand what they are doing and are aware of the risks involved, investing in the stock market should be something to look forward to. It is important to do your research and put your money into a diversified portfolio of stocks with a long history of performance.

Shares might change over time, but the exchange can always be relied upon to keep its offer of performance open.

Investors are always advised to consult their independent financial adviser and perform their due diligence before entering into any kind of trade or investment.

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