What is share dealing?

Something you'll need to master if you're going to be an effective investor is the art of share dealing — the buying and selling of shares on the stock market. Here, we cover the key points you need to know to help you invest like a pro.

A woman uses her mobile phone to make a purchase.

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An introduction to share dealing 

Dealing (or trading) in shares means buying shares and selling shares. Shares represent part ownership of a company. When you deal in shares, you are buying and selling part ownership of different companies. 

The share market is a sizeable virtual marketplace that comprises thousands of publicly-traded companies. Each of these companies has millions of shares on issue that investors can buy and sell in the market. Like in any other marketplace, the buyer and seller must agree on a price for any transaction to take place. Share dealing occurs when a price is agreed upon, and the shares change hands. 

Most people buy or sell shares to build wealth, which could be in the form of dividends or capital gains. Dividends represent a portion of company profits that are distributed to shareholders. Capital gains are made when you sell your shares for more than you bought them. 

How to get involved in share dealing 

There are several ways you can get involved in share dealing:

  1. By engaging a share broker  
  2. By opening an account with an online brokerage or share dealing platform 
  3. By investing in a managed fund

A share broker is a financial professional who executes orders to buy and sell shares on behalf of clients. 

Online trading is more common these days, but before its invention, investors relied on share brokers to execute trades. Share dealing platforms allow investors to place buy and sell orders for shares on their own behalf. Customers have a share dealing account on the share trading platform. 

Another option is to invest in managed funds, where you rely on a fund manager to make share trading decisions for you (in return for a fee). 

Share brokers 

A share broker matches buyers and sellers to facilitate the share dealing process. They make trades for you and can offer tailored advice.

They charge a fee for this service that can be high in comparison to online brokers. Share brokers may charge per hour for their services or a percentage of your total investment account – likely between 0.5% and 1%.

Online share dealing 

When we talk about share dealing these days, we typically mean dealing through online brokers. These companies operate websites that act as brokers for investors looking to buy and sell shares. Computers are often used to match buy and sell orders.

An online share dealing service requires you to do more for yourself. You are unlikely to receive personalised advice. But many online share dealing sites offer general research and data to help you make investing decisions.

The cost of online share dealing is usually lower than that of a share broker. While fees vary from platform to platform, a typical fee for buying (or selling) shares in a single company might be between $10 and $20, depending on the amount of your investment. 

Managed funds

Managed funds are a type of investment where many investors' funds are pooled together and then used by the fund manager to buy assets, such as shares, bonds, or property. Investors own units in the fund rather than the underlying assets. However, the performance of the units in the fund will depend on the performance of the underlying assets.

There are a wide variety of managed funds that investors can invest in. The fund manager will charge a fee for managing the fund and making investment decisions. 

How much does share dealing cost? 

There are many benefits to investing in shares – the primary one being to help you make a return on your money and build your wealth. Your total returns will, however, depend on any costs you incur as a result of your share dealing. 

Fees and charges

Here is an overview of some of the main fees and charges you could have to pay if you are share dealing: 

  1. Trading fees – these can be fixed and relatively low or may depend on the size of each share trade. For trades over a specific amount, brokers may charge a percentage fee instead 
  2. Transfer fees – there can be costs involved in switching brokers. Your new broker is unlikely to charge you for transferring shares, but the old broker may charge you a fee for the transfer to another broker 
  3. Inactivity fee – some brokerages may charge if there is no activity on your account for a certain period. The amount will depend on the individual broker. 

Share dealing taxes 

Aside from any charges levied by your broker, you may also be liable to pay taxes on your share dealings. There are two main types of tax to pay on your share dealings in Australia.

  1. Income tax – is payable on any income (such as dividends) you receive from your shareholdings. How much tax you pay will depend on your total level of income. The higher your marginal rate of tax, the more tax you will pay
  2. Capital gains tax – if a company's share price has increased over the time you have held those shares, you will make a capital gain when you sell them. Tax is payable on capital gains at your marginal tax rate. If you have held your shares for more than 12 months, however, your capital gain will be discounted for the purposes of levying tax. You can also use capital losses incurred previously to offset your capital gains to reduce the tax you have to pay. 

How to start share dealing 

If you've made it this far, chances are you are interested in trying out share dealing yourself. Here are four easy steps to help you get started. 

1. Choose a broker 

You need a broker to execute trades on your behalf. A broker can be either a web-based platform or an individual. Which one you choose will depend on your personal circumstances and preferences. You should ensure the type of service you select fits your financial situation. A high level of personal service usually involves a high level of fees. 

Fees are essential as they will factor into your overall returns. You must understand the fees you will be paying upfront. Take some time to shop around and get an understanding of the services available and associated costs. Many share dealing platforms provide users with access to different research tools that can be beneficial in assessing potential investments. 

Access to things like company research can be vital if you are managing your portfolio yourself, or you're a newer investor. Some online brokerages offer low-cost trades but don't offer the range of resources required to make an informed investment decision. 

2. Understand your investing goals

Share dealing can be fun, but it needs to be done with purpose. You deal in shares because you are working toward a greater goal. That may be early retirement, your kids' education, or a self-funded lifestyle. The point is your share dealing needs to bring you closer to your investment goals

To begin to understand your investment goals, you can ask yourself questions like: 

  • What do I want my money to do for me?  
  • Financially, where do I want to be in 10 years? 
  • How much risk am I willing to take in pursuit of higher returns? 

Once you understand your investment goals, you can search for options that align with them. This could include environmental and sustainability goals as well as financial goals. 

3. Research your investment options 

Get familiar with the types of companies and exchange-traded funds (ETFs) that are traded on the ASX and other exchanges worldwide. There is a broad universe of investment options, with Australian investors now easily able to invest in international shares

The tricky bit is to narrow your focus sufficiently to identify opportunities. It helps if you view the range of available investment options in light of your investment goals. You need the two to be complementary if you hope to achieve the latter. 

The 'right' investment for you will depend on your financial situation and investment goals. If you are nearing retirement, you may be hesitant to risk capital on growth shares, perhaps preferring value investing or bonds. On the other hand, if you have many years left in the workforce, you may be more willing to take risks as you can work to make up for any drop in your investments' value. 

4. Take the plunge!

There is no perfect time to start share dealing. The only thing experts agree on is that it is generally better to start earlier rather than later. This is because of the effect of compounding

Compounding occurs when you earn returns on your investments and reinvest these returns to make even more returns. Over time, the effect can snowball, significantly enhancing your wealth. 

If you're ready to start share dealing and investing in your future, you should not let uncertainty hold you back. The future is inherently uncertain. What is important is that you understand your options and make choices that align with your financial goals. 

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a 'top share' is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a 'top share' by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.

The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.