It may seem fairly simple how to buy stocks on the ASX.
Setup an account with an online broker, pick some stocks and click the buy button.
Unfortunately, it's not quite that simple – although less complicated and difficult that you might think. This article will take you through some issues you might want to consider.
Here at The Motley Fool, we've always argued that you need to have a diversified portfolio – in other words, a mix of stocks for protection. We also think you should have a mix of solid, stable companies that can deliver income in the form of dividends and companies growing strongly, that should provide the majority of the capital gains from growth.
Planning what your portfolio will look like in the short, medium and long-term should be one of the first steps you take before you even buy shares. It's like anything worthwhile in life, if you don't have a plan, you plan to fail. You could compare it to building the walls of your house without considering what it will look like in the end.
In the short term, you want to begin by building the foundations of your portfolio, as we outlined in detail in this article earlier this year. What that article didn't address is how much should you buy and when. After all, you don't want to throw all your cash at one stock.
Buying in Thirds
Two ideas that can help you if you are new to investing is Buying in Thirds and dollar-cost averaging.
What that means is entering into stocks you plan to hold for the long term in three incremental steps. The idea is simple. Take the amount of money you plan to hold as a full position in that stock and divide that amount of money by three. Then pre-determine when you will buy the desired stock, in those three pieces.
An example might be deciding that your first purchase will be telecommunications giant Telstra Corporation Ltd (ASX: TLS) and you are going to invest $5,000. Over time you can add to this but to get started, you decide that $5,000 will get you setup. Your first purchase might be for $1,000 worth of shares, with 2 additional steps of $2,000 to come. And you might decide that your time frame is over the next 3 months. So $1,000 this month, $2,000 next month and the remaining $2,000 in the month after that.
The benefits of buying in thirds
The positive psychological benefits include taking out the 'all-or-nothing' feel to investing. If the stock goes down the day or weeks after, you don't spend all your time kicking yourself. The benefits also accrue whether the stock goes up or down. When it goes down, you can be glad you didn't put all your money in at once, and get a chance to buy shares at an even better price. If it goes up, you are more likely to be emboldened by your success and invest further into a 'winning' stock.
Dollar-cost averaging
Another way of levering yourself into the stock market is through dollar-cost averaging. This strategy involves splitting your total sum to be invested in the market into equal amounts and then investing that over time. Using the $5,000 and Telstra example above, this could involve buying five $1,000 lots over five months rather than buying in thirds.
Disadvantages
Studies done in and around dollar-cost averaging have typically documented that it's better to invest in lump sums than in increments. Why? These studies show that since the stock market tends to rise over time, the longer you wait to put in cash, the more opportunity cost you're paying.
Foolish investors can weigh that logic against the psychological benefits named above.
Foolish takeaway
There are no strict rules around how much, when or which stocks you should buy, but having a simple strategy and a plan for your portfolio can go a long way to getting you off on the right foot.
