The share market had one of it’s largest falls in a long time recently- and it has probably been a nervous time for many investors. When the market fell- I decided to do nothing and ride it out. And as I write this today my investments have bounced back up and past what they were pre-fall.
All the volatility in the market has lead to a surge in retail investors. Just take a look at the volume of trades on the NZX. There is clearly a rise of new retail investors in the market that could be artificially inflating the market.
Are investors diving into the market because of FOYO- the fear of missing out? Or is it the rise of online platforms making it easier to play the game?
Among the “which stock should I buy” type questions, there are always questions about which investment platforms to use? I recently read a question about Sharesies– “is Sharesies a scam?”- which made me smile. In all seriousness though, the number of investment services available to DIY Kiwis has grown in recent years too. Take a look below;
Alongside others like ASB Securities, Direct broking, and SuperLife. There are probably others I don’t know about as well. So what are they all? What is the difference between them? And which is the best for you? You can get more specific details about each of the platforms in my previous post-DIY Investing In Funds And Shares In New Zealand: Popular Investment Platforms For Kiwis. This post is more of a broad overview of the type of investment platforms.
Accessing the Share Market
In essence, many investment services do one thing- they allow you to access the sharemarket. That’s basically it. But they all do it in different ways. And because of this, you need to know a little bit about how it works to decide on which platform or service you are going to use depending on your investment strategy.
How you can access the share market is summarised in the image below. You can get accesses to the share market in several ways. Either you can invest in companies directly through shares, or you can purchase a group of company in a fund.
Types of Platforms
An oversimplified view would be to split investment companies into 3 types; Brokers, Fund Managers, and Fund Platforms.
A share broker is a middle man that gives you access to individual shares. They give you the power to buy and sell shares on the market.
Share brokers are becoming more popular in New Zealand for DIY investors. The main reason for this is that new low fee trading options like Sharesies and Hatch have become alible in New Zealand. What broker suits you best will depend on what you want to invest in and how much money you want to invest. Sharesies gives you access to New Zealand and US share markets, Hatch and Stake give you access to the US share market.
There are slight differences in the owning structures of your shares depending on who you go with. With Sharesies and Hatch, individual company shares are not in your name- rather they are a custodians name and you are registered with the custodian as owning the shares. With Stake and other brokers like ASB securities and Direct broking- company shares are in your name.
Fund Managers are responsible for the creation and overall management of a fund that is offered to you as an investor. You are most likely already engaged with a fund manager through your Kiwisaver provider- they are a fund manager. There are some big names in the fund manager space that you have probably heard of before- like AMP and Vanguard.
In essence, a fund manager is another type of middle man, but instead of buying and selling shares- they allow you to buy and sell units in funds. More about funds later. Fund managers are usually not as fast as share brokers- i.e. if you buy some fund units, or sell some fund units, it normally takes a few days to process- or some fund managers will process all orders on a particular day of the week. But it really depends on which fund managers you are with, and if the fund is an exchange-traded fund or not.
A fund platform can be described as a market in itself- they give you the ability to buy and sell units in funds from many fund managers all in one place. Generally- Most of my investments are done through a fund platform. They’re my favourite way to invest in funds because of their low fees, low minimum investments, and a large variety of funds to pick from. The best fund platform is probably InvestNow, a platform offering around 120 funds, and Sharesies, a platform offering around 40 funds.
Managed Funds and EFT/Index Funds and Individual Shares- What’s the difference?
If you want to invest in the share market you will either have to buy units in a Managed Funds, EFT/Index Funds or buy individual company shares. Company shares are a unit of ownership of a company- so if a company has 100 shares- and you own one of them- then you own 1% of the company- of your share of the company is 1%.
Ok, so company shares are somewhat straight forwards- but what about managed funds, ETFs, and Index funds. Passive or Active funds. What is the difference between them? Well- they are all in similar in that they are made up of individual shares and bonds, but they are also slightly different. So lets start by going over what a fund is.
What is a fund? A fund is where a group of investors pool their money together to invest in a group of assets. The assets can range from shares, bonds, ect. And each fund will have a “goal” as to what it is trying to do. For instance- you probably have a Kiwisaver fund- if its a growth fund it’s goal will be to grow your money over time.
So a fund is a butch of shares all grouped together. Fund’s come in slightly different type.
A Managed Fund is sometimes called a mutual fund in the same way that shares are sometimes called stocks. The term Managed fund basically covers all funds as all funds need a manager to exists. They can, however, be actively managed or passively managed.
Actively Managed Funds
Actively Managed Fund are fund where the fund manager picks and chooses the individual shares that make up the fund. They choose to buy and sell shares in the fund according to the fund’s rules or strategies. The fund manager is paid to do this work for you so you don’t need to have in-depth knowledge or need to actively follow what’s happening in the market.
The downside is that actively managed funds usually have higher fees than passive index funds. Higher fees over time can have a significant impact on your long term performance. That is why I tend to stick to low-cost index funds with my investments.
Passive Index Funds
An index measures the performance of an entire market, or part of a market, by following the performance of the individual shares within the index. The S&P/NZX 50 index as an example, the performance of the index is the combined performance of the 50 companies within the index.
The beauty of an index fund is that they are usually cheaper to operate as you do not need to employ strategists or share market analysts. Instead, the fund is directed by what the share index is doing and passively following it- hence the name passive index fund.
ETF/Exchange-traded funds are often confused with index funds but they are not the same thing. Exchange-traded funds are funds that you can buy and sell (trade) on a share market (the Exchange). This means that exchange-traded funds can be managed funds or index funds.
And it also means that not all index funds are exchange-traded funds either. Kernel has 6 index funds, which are not exchange-traded funds.
The benefits of an exchange-traded fund compared to other funds is that they are more liquid. Because they are traded on the share market they can easily be bought and sold.
PIE funds or Portfolio investment entity (PIE) funds are managed funds that have a special lower tax rate. When you invest in a PIE, the tax on the income from your investment will be based on your prescribed investor rate (PIR).
Your PIR tax rate is worked out on your taxable income in the last two income years and may be lower than your marginal tax rate. For example, if you normally pay tax at 33%, you will only pay 28% on your income from a PIE fund. This may make a PIE fund tax advantageous for some people.
How do you make money from Funds
As with many investments- there are two way of making money with funds. Capital gains and Dividends.
Capital gains – Individual assets inside a fund constantly go up and down in value over time. This will be reflected in an increase (or decrease) of a fund’s unit price, which represents how much each unit of a fund is worth at any given time. If you sell your units for a higher price than what you paid for them, you’ll make money from a capital gain. If you sell your units for a lower price than what you paid for them, you’ll make a capital loss.
Dividends– Some Funds may collect distribution and interest payments from the underlying assets inside the fund. Some funds payout this income regularly as a dividend. Some funds don’t pay dividends or choose to reinvest your share of dividends for you. This is normally reflected in an increase in your unit price.
Why Invest in a Fund
Funds allow you to pool your money together with many other investors. This gives you the efficiency of scale. This efficedny of scale helps with reducing the fees you pay as well as helping your investment diversification.
You can access a much more diversified set of investments than you would be able to access on your own. Many funds can contain hundreds or sometimes even thousands of individual companies in them.
Another benefit is that you don’t have to spend time and effort finding, researching, and picking individual shares or bonds to invest in, as the fund manager does all that work for you.
Diversification, lower fees, and time-saving are all reasons why I stick to passively managed index funds over individual shares. And one of my favourite passively managed index fund provider is Vanguards.
NZ DIY Investments Companies
Just to give you a lay of the land- below is a diagram with some of the DIY investment platforms currently available to you.
- Fund Platforms: InvestNow, Sharesies, Superlife
- Fund Managers: Kernel, Simplicity, Superlife, Smartshares
- Broker: Sharesies, Hatch, Stake, ASB securities, Direct Broking
If you want to learn more about each of these investment providers check out my previous post on DIY Investing In Funds And Shares In New Zealand: Popular Investment Platforms For Kiwis.