We’ve all seen movies like the Wolf of Wall Street, Boiler Room and Limitless, where some genius/wizard/hunky hero makes a killing, wheeling and dealing with nothing but a telephone and a computer. Gosh, don’t they make share trading look exciting?
It’s films like these, plus the wild, outrageous success stories of “that guy your uncle knows” striking metaphorical gold, that entice new investors to enter the stock market arena and try their luck in a game which has existed since the 1700s.
As always, we’re here to break things down for you, dispel some common myths, and give you some basic guiding principles that will help you make better investments if you’re just starting out investing in shares.
In this article:
- The Basics
- Things To Consider Before You Start Investing
- Common Share Trading Mistakes To Avoid
- Simple Tips for Smarter Trading
- Next Steps On Your Investment Journey
What are shares?
A share represents a tiny slice of a company that, for a fee, you can own.
What determines the prices of shares?
The stock market is a living beast, with a daily current that shifts like the ebb and flow of the ocean. Ahem. Sorry to go all poetic on you. What’s important to know is that the price of shares isn’t *just* based on whether a company is “doing well” or not – but more to do with a supply and demand equation. For example, if 10,000 people want to buy shares of a particular company, but only 1,000 wish to sell them, you can imagine that the price will be higher since there’s more demand than supply. The stock market is a never-ending auction, with the ASX (Australian Securities Exchange) acting as the auctioneer in the buy-sell process by determining the correct price for the shares in question.
How do you make money from investing in shares?
Good question, and one which is often overlooked! There are two ways to make money with shares.
- You hold onto the share and watch its value increase over time (ideally because you’ve chosen to invest in a good company with growth potential). When the time comes, and you want to “cash out”, you sell your shares – your profit is the difference between what you sell them for and what you paid for them originally. Eg., if you bought a share for $1.05 in 2010, held onto it until today and then sold it at its current market value of $4.20, you’d have pocketed $3.15. Doesn’t sound like a lot, but imagine if you had a thousand shares? Or ten thousand?
- In some cases, you can also get paid portion of the company’s profits as dividends, typically paid out twice a year by companies as a way of rewarding their shareholders for their loyalty and investment. Not all companies pay dividends, and you should be aware that the shares that “come with” dividends tend to appreciate in value slower than those which don’t.
Things To Consider Before You Start Investing in Shares
#1 Set your investment goals.
How long are you planning to invest for? Are you aiming to invest for XX years, or trying to make XXX amount in a certain time period? Answering these questions will hugely influence your investment strategy (i.e., the types of shares you buy, how long you keep them for, etc. – we’ll cover this in a more in-depth article about investment strategy).
#2 What is your budget?
This is a question that only you can answer. Everyone’s financial circumstances are different, not to mention their goals and tolerance for risk. Speaking of risk, you do need to be aware that bad things can happen in the stock market, especially to unprepared, uneducated or overconfident investors. When deciding on your budget, you need to find an amount that you are comfortable in 1) not having access to while it is tied up in the stock market, and 2) can stand to lose, in the case of an unprecedented economic disaster like the Global Financial Crisis or COVID-19.
It would be irresponsible of us to write this article without alerting you that investing in the stock market carries some risk. Utilising the services of an experienced, professional financial advisor gives you the best chances of getting a great return on your investment while minimising the associated risks. We’ve been helping investors just like you manage their portfolios for close to 15 years. Give us a call today to talk about your financial goals – if we don’t believe we can bring you a profit (including our own fee) we’ll tell you straight up.
How to buy and sell shares
When it comes to buying and selling shares, you have two options – use the services of a broker, or go it alone. We talk about both below.
Using a Broker
Stockbrokers are experienced agents who act on your behalf to help you minimise your risk and make better investments (for a fee, of course). It’s common for new entrants to the stock market to use a broker initially, to help get a feel for the market and the process of buying and selling, before (but not always) striking out on their own. The ASX website has a list of Australian stockbrokers you can browse to find one that meets your requirements. Of course, you could also just book a free consultation with us and save the hassle of searching…
Investing by yourself
Buying shares in a company is a little more complicated than popping down to the local newsagent and placing your order, although technology is making it easier every year. To perform your share trades, you’ll need to create an account with a share trading platform. The marketplace is saturated with such platforms now, giving you a huge – even overwhelming – amount of choice. Here’s a 2020 list of the best share trading platforms in Australia.
Once you’ve got your trading account set up, you can browse available shares and proceed to purchase/sell them through the platform. Choose carefully – every transaction you perform incurs a brokerage fee. This fee amount is usually low (with some platforms charging around $5-20), but it can add up very fast if you are indecisive about your purchases, or pursuing a rapid turnover strategy trying to turn a quick profit.
Regardless if you decide to engage with a broker or invest by yourself, we highly recommend you seek independent, professional financial advice tailored to your situation before making any investment decisions. Ask your adviser about the pros and cons as they apply to your situation, should you decide to invest in shares.
How much do you need to get started investing in shares?
The answer to this depends on which investing route you go for – most brokers require you to make a minimum initial investment of $500-1000, where other, larger hedge funds will ask for even more to engage with you. If you’re self-managing through a share trading app or platform, the minimum limits are normally much lower – CommSec Pocket, for example, let’s you invest from your smartphone from as little as $50.
If you’re just getting started and want to dip your toes in the water, there are several free Share Trading Games you can play to get used to the way trading works. Here are two we’ve had recommended to us: by StockWatch and by the ASX themselves. Both games are designed to simulate stock market behaviour and let you make share purchases using non-real funds to practice trading without risk.
Is investing in shares worth it over just putting your money in the bank?
Well, it depends. Mostly it depends on your risk tolerance, and how aggressive you want your investment strategy to be. You can probably guess the answer – putting your money in a savings account is going to bring you a lower rate of return, but with the “set and forget” kind of peace of mind that comes with low maintenance, low-interest type savings accounts. And don’t just take our word for it – a 2018 study by Vanguard showed that a $25k investment, over seven years, would grow to about $31k in a savings account versus $45k in the Australian stock market.
So you need to ask yourself, how involved do I want to be with my investment? And what rate do I want to see a return on my investment? This will help guide you towards the right option for your circumstances.
Common Share Trading Mistakes To Avoid
Panicking at the slightest downturn
Even those who have never touched a share have heard the expression, “buy low, sell high”. Unfortunately, what this mentality looks like in reality is that as soon as a stock’s price experiences even a slight decline, amateur investors unload their shares like they’re going out of fashion. Successful long-term investors understand that the nature of the stock market is tumultuous, and that occasional downturns are a natural part of the lifecycle. Consider this: if you plan to hold onto a stock for 10 or 20 years, dipping in value for even six months, a year, or three years, is just a small speedbump in a much larger upward trajectory.
How to avoid: Take a deep breath, and don’t let fear rule your decision-making. Don’t follow others blindly, and ensure all your decisions are founded on research and clarity.
Performing too many trades
Remember what we said earlier about every transaction costing you a brokerage fee? Well, those fees add up. Fast. If you come in with your guns blazing trying to simulate the spectacular “day trading” feats portrayed by Hollywood, you’ll quickly erase your profits under an avalanche of brokerage fees.
How to avoid: Do your research, pick a stock, and unless the building is burning down, commit to it for the duration you planned to.
Making decisions based on other people’s opinions instead of research
Be warned: as soon as you tell your friends and family you are “in the stock market game”, everyone and their dog will have a great stock to recommend! Take these stock tips with a generous pinch of salt… By all means, investigate the companies to see if they could be worth your while, but *do your research*. You’re not buying shares to make you’re Aunt Jill happy; you’re doing it to make a profit.
How to avoid: Always make your share purchase/selling decisions based on facts, data and analysis, not someone’s opinion or suggestion, no matter how much you like or respect or want to impress that person.
To avoid putting all your eggs in one basket, you should diversify your portfolio by investing in more than one stock. This does mean you need a bit more investment capital, to spread the wealth around a little, but it protects you from losing a sizable chunk of your investment if one of your stocks takes a turn for the worse. Investing in index funds* is a popular diversification strategy, but they do come with their own pros and cons – we’ll write more on that in another article soon.
*Index funds are a collection of reputable ‘blue-chip’ company’s shares that you can “purchase in a bundle”.
How to avoid: Split up your investment capital into roughly equal-sized chunks, and find appropriate, well-researched shares to invest each portion in.
Simple Tips for Smarter Share Trading
#1 – Study, study, study, then study some more.
When it comes to investing in the stock market, you need to be constantly upskilling and learning – not only in strategies around trading and picking the best stocks, but also researching the market to identify investment opportunities. Warren Buffett is the most successful stock trader in history, and in his own words, he just “sits in his office and reads all day”. In addition to books (yeah, he’s old school), he also reads hundreds of pages of corporate reports and five newspapers every day. Buffett does this to be constantly abreast of changes in the market. He takes his role as a part-business-owner (shareowner) seriously – he actively monitors the health of the companies he invests in because he has a vested interest; if they’re in danger, so is his investment.
(Here’s a link if you want to read more about Warren Buffett’s approach to investing.)
To kick-start your education, we highly recommend the ASX’s Investment Tools and Resources, which has content, courses and FAQs aimed at all levels of investors.
#2 – Be Patient
The most successful (i.e., richest) stock traders in the world are those who hold their investments *for decades*. To them, time is not an obstacle but the steady trickle of water and nutrients feeding their investment. You should regularly review your investment strategy (print it and stick in on the wall!) and speak to your financial advisor – this keeps your plan firm in your mind and will help you stay focused. Investing in shares is a marathon, not a sprint, and stopping every 5 minutes to check if your shoelaces are untied is only going to hinder your progress towards your goals (okay, that’s the last metaphor, we promise!).
Next Steps On Your Investment Journey
The stock market is an exciting and potentially rewarding avenue for investment. Whether you decide to engage with a broker or manage your own share trades, consulting with an experienced financial planner is essential for ensuring you don’t waste your hard-earned capital.
Raeburn Advisors offers obligation-free consultations where we assess your current financial situation and your goals, before providing bespoke advice to help you make better investment decisions, reduce your debt, and plan for retirement. We have a no-nonsense approach to financial planning; we simplify financial advice by dispensing with all the confusing industry terminology and take things back to basics to give you maximum insight into making the best financial decisions possible.
Call us today to talk about your situation and goals.
This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.