The purpose of this FAQ is to give some insight into the kind of research you need to do in shares and how much you might be able to expect in terms of returns, and what sort of risks there are.

Shares are the best investment available over a long period of time. The growth of share prices comfortably out-paces inflation most years because the best share prices represent the growth in earnings of the best companies. Although the stock market is seen as "high risk" this depends very much on timing and the sort of shares you invest in. It is possible to invest in shares with very little risk if you are willing to put in a great deal of effort in learning the art of investment and doing ample research.

Shares have acquired a high-risk reputation because the majority of people only participate in the stock market during bull markets, buying at or near historic high prices in the belief that past returns may by a good indicator of future results. Those that buy just before a crash do not appreciate share valuations and upside potential vs downside risk. In fact such considerations actually bore them and many newcomers choose to trade shares in a highly speculative fashion, making the stock market into little more than a casino.

The rewards are great, but the penalty for laziness is also great. Those that buy on "hot tips" and rely on the opinions of others, without any knowledge of what they are doing are often those who suffer the greatest loss.

A "share" is nothing more, and nothing less than a partial ownership of a business. If you look at shares investment as the partial purchase of businesses, you are already half way to becoming a successful investor (the other half is to get some idea of what a business is worth, economically, and hence to be able to value a share). If you think of shares as part ownership of businesses you have a substantial advantage over those who think of them only as abstract pieces of paper with a randomly fluctuating price tag.

If you bet on shares the way you bet on horses, you will have roughly the same success as a punter at the track. If you instead concentrate on buying businesses, thinking in the same way as a businessman, then such concepts as "hot tips", "inside information", crash predictions, "momentum" and other market concepts become irrelevant.

Would a tradesman worry about how much a secondary market is willing to give him for his business? The guy is busy juggling employees and taxes and purchases and invoices, just trying to turn his operation into something profitable. How many small businessmen put a business broker on speed dial, asking him every day what he thinks his business may be worth? If a business broker was going to give daily quotes to estimate the purchase price, would the small businessman panic if the broker started giving unreasonably cheap quotes for the business and sell it immediately, irrespective of price?

It would make no sense for a business owner to sell his business just because some guy offered to buy it from him for less than another guy was going to give him last month, yet somehow the organisation of a formal market where businesses can be bought in portions is different in the mind of some people? Why?

Does a businessman care what someone wants to buy his business for if he has no intention of selling? If Alan Bond is the one who wants to buy your business you might sell it to him (and then buy it back a couple of years later for hundreds of millions of dollars less), but if the offer given is not an acceptable one, do you take the offer or ignore it? When the offer is made by a stock market, somehow people see this as something different, and will sell their perfectly good business to a new owner, just because the market doesn't feel like giving the business a very good price today.

The unfortunate reality is that most members of the public rely on popular media for information, and read the doom and gloom reports in the news about the latest recession, keeping out of the market at the very time when purchases are to be made with the least risk, only to plough large chunks of their savings into the market years when prices have risen steadily and may well be in the last throes of a speculative rush.

Direct share investment is not suitable for everyone, many simply do not have the time or the inclination to research a portfolio adequately, and will be exposed to the greatest dangers when they do take the plunge and buy something. Managed funds are available that give returns roughly in line with market averages (if you take into account tax and trading expenses) and these are by far a superior investment for those that do not wish to make investment their profession.

Shares, as a whole, are not highly speculative investments with a low probability of success. The chances of making money in shares over all but the shortest time frames are excellent, however you need more than just money and a desire to succeed in order to invest successfully.

Many amateur investors, once they have learnt the appropriate skills can beat the returns of large managed funds by a large margin, thus forever disproving the "efficient market hypothesis", which states as its main tenets that no one can ever beat the market regularly except through pure luck.

These individuals are not necessarily of far above average intelligence, but are usually hard workers who invest frugally and sensibly. They read all they can on investment, and follow the principles of value and growth that have made such super-investors as Warren Buffett the most successful investors of all time.

Exercise the same judgment that you would while buying any business. Remember that a share is a part ownership of a company, if you were to buy a family business, would you buy a gold prospecting business or a strongly growing food franchise? Most people regard those guys out there in the desert looking for gold as a bit nutty, the real chances of making any wealth are not great, yet speculative prospecting shares are often the first (and last) shares many new investors will buy.

As you read on in this FAQ you will find many methods of picking stocks. Academics tell us that there is no point ever looking at a business and trying to find a good one, as all businesses are fairly priced and equally good to buy - the efficient market hypothesis. They tell us that if you want to buy a business that will provide a good return, you should buy one with a wildly gyrating price quoted on the market - beta and the capital asset pricing model. (When I put it that way it sounds really weird, but if you read about beta and how it is used you will find that this is exactly what the model says you should be doing).

A bunch of people don't care much for the academic way of doing things, so they just a look at the history of recently quoted prices. These people - technical analysts - consider the purchase or sale of holdings of a business based only on the recent trend of offers made on the business. Imagine if someone considering purchasing a business decided that instead of checking the books and figuring out how the business work, they just find out what price the last guy was offering, and how this related to the guy before that. This is the basis of technical analysis. I didn't write this site to bash technical analysis, but I am trying to make a point here - technical analysis is not an investment technique, it is something only speculators may employ. Sometimes they will be successful, sometimes they won't be. People lose a lot of money when they use technical analysis to enter trades, then the price falls away into loss territory, and the technical analyst decides to become a long term holder instead. Methods that traders use should never be used to justify an investment decision, only analysis of the company accounts and the economics of the business will tell you if a business is worth holding or not.

Businesses traded on the Australian market have given investors returns averaging around 10% a year, compounded, over the last hundred years. Talented investors may return between 10% and 20% a year on average, and if you buy in the darkness of a bear market and sell when Woman's Day starts running shares articles you can do even better. (If you are wondering why I am swiping at Women's Day, read on and pay attention to the section on contrarian strategy and investors tendency to think as part of a herd).

The market does provide good clues as to what future returns will be, but they are often the opposite of the returns from the previous five or ten years. The best time to buy is when the last few years have been absolute disasters, as shares are cheap and can only go up. The worst time is when shares are running up on the back of a decade of big gains. Waiting for the market to prove to you that it deserves your money is the wrong policy, but it is the policy most people adopt.

If you do not wish to do any research, regular contributions to managed funds are very sensible. Large funds are highly diversified, and very rarely lose all of their value. Even if the market does crash a few weeks after you invest, managed funds will make steady gains from then on and will eventually, perhaps many years later, bring returns superior to cash, bonds or property. Only futures trading has the potential to make higher profits, though with a significantly higher risk, and low rates of success.

No one should be afraid of the stock market, it does not crash without reason at any random time. If you choose to ignore stocks out of fear of a market downturn, you ignore the best investment