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Why We Invest In Shares

Credit: Simon Cunningham

Have you ever wondered why people invest in shares?

It may seem like a very trivial question but, believe it or not, the answers can be many and varied. They range from the amusing “I don’t really know” to the equally amusing “…because my friend does it”.

Most people, however, invest in shares because they want to make money. But if that was the only criterion, then surely there are other ways that we can make money. For instance, we could put our money into fine wines, coins, stamps, art and even vintage cars. I’ve even heard about people who invest in Victorian toilets but that strikes me as being a little inconvenient.

For me, though, there are four very good reasons why I like investing in shares.

Capital Growth

This is, perhaps, one of the main reasons why we should invest in shares. When we buy shares in a company we are acquiring a slice, albeit in most case a small one, of a business. For instance, the 30 Singapore that make up the Straits Times Index (SGX: ^STI) are valued at around 14 times earnings. This means we are paying approximately $100 for every $7 that Singapore companies make, which is not, in my view, expensive. Furthermore, over time, the businesses should grow, and as a part owner of these businesses, our investment should increase in value too.

Yield

 Apart from participating in the growth of a business, many businesses might also distribute some of their profits to shareholders. This, generally, is delivered to us in the form of dividends. What’s more some businesses have a long history of reliable pay outs. Pleasingly for us, the dividends that land in our bank accounts can be reinvested into more shares. So over time you can build up your stake in the business.

Diversification

 Buying shares is also a great way to change the way that our wealth is distributed. For instance, in recent years many of us have seen the values of our homes increase. This may be at the expense of other investments. Having too many eggs in one basket can be quite risky, especially if our wealth hinges disproportionately on the movement of property prices. But by investing in shares, we can go some way towards compensating for this uneven distribution.

International Growth

Placing too much emphasis on a single economy (even one as solid as Singapore’s) can sometimes be a little troubling. However, buying shares can be a good way to gain exposure to overseas markets since many Singapore businesses already have interests overseas. Consequently, investing in shares can be a good hedge against a possible slowdown in any one economy.

For me, investing has been part of my DNA ever since I was knee-high to a grasshopper. It can be a good way to build wealth over the long term if you just keep adding money to your stock market investments over time. So, the earlier you start investing, the sooner you could start to reap the benefits of buying shares.

This article first appeared in a SIAS newsletter.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.