There are many different sharemarket investment strategies, but ultimately they all aim to build wealth through share price growth or the generation of cash income.
Before investing, you should consider your investment goals and tailor your strategy to suit. You should also have a clear idea of the circumstances in which you might need to change your strategy or sell shares.
Questions to ask before investing
- What do you want to achieve from your investments?
- Do you want a return in the form of income or capital growth?
- Are you prepared to risk some of your capital for the opportunity to make higher returns?
Growth or income
Investment strategies commonly focus on growth, income or a combination of the two.
- Growth: Growth investing aims to achieve share prices growing at a rate higher than inflation. It favours investments that are likely to see strong capital growth rather than paying dividends. A growth-based strategy might suit you if you have a long-term investment horizon and are looking to build up a substantial asset base.
- Income: Investing for income aims to achieve shares that pay high dividends. Using franking credits can also increase the value of dividends. An income-based strategy might suit you if you are looking to supplement or replace an income – for example, if you are approaching retirement.
Some dividends are issued as fully or partly franked. This means they carry imputation or ‘franking’ credits. These credits can be used by some shareholders to achieve a tax offset or a reduction in the amount of tax to be paid. If your marginal rate of tax is lower than the company tax rate, you may be able to use the excess franking rebate to reduce the tax payable on other sources of income. The tax implications of investing in shares may vary depending on your circumstances, and you should take your own professional advice.
There are many ways to analyse a company's share performance, but most fall into one of the following two categories.
- Fundamental analysis looks at the business fundamentals, future outlook and financial indicators of the company, such as its balance sheet, income statement and financial ratios
- Technical analysis looks at past price movements of an individual share or of the market as a whole. Charts are the key tool used in technical analysis.
Many investors combine elements of both analysis techniques to determine their share investment choices.