Motley Fool Australia

Beginner’s Guide to Investing in Shares

Investing in shares is a great way to grow one's wealth. But the world of investing can sometimes appear so intimidating and confusing that many people who could benefit from it simply decide not to get involved. By demystifying share investing and learning how it all works, it’s our hope that you'll see it's fairly simple and can lead to great rewards.

For those who are looking for some investing 101, you've come to the right place. So continue reading, and we'll walk you through everything you need to know in our Beginner's Guide to Investing in Shares.

What are shares?

So what are shares, and how does investing work?

Shares, also called equities, are like tiny pieces of a company. If you invest in shares of a company, you own a small piece of that company. And your shares are worth a proportion of that company's value.

You can either own shares on your own, or you can pool your money with other people in a fund. Funds are managed by a fund manager. If you invest in a fund, you won't have to put in the work of deciding which specific shares to purchase. 

When you purchase shares directly, you become a shareholder. This typically means that you have the ability to vote on some company decisions. You can't do this if you own shares through a fund though.

Shares are sold and bought on the stock exchange, typically the Australian Securities Exchange.

Select your brokerage service to buy and sell shares

If you want to invest in shares, you can use a full-service broker or an online broking service. Let's look at how they differ below.

Online broking service

With an online broking service, you can open an online trading account and be completely in charge of your own investment decisions. And because you make these purchases yourself, your fees are going to be relatively low. You'll have to pay a fee each time you make a transaction, and those fees typically start around $15 (although some can be as low as $5). 

When choosing an online broker, you'll want to consider how much you'll be paying in transaction fees. Brokers might also charge you other fees. Common ones include a foreign exchange fee, a subscription fee, and an inactivity fee.

You'll also want to see what the brokerage will let you trade. Some platforms only let you trade shares that are on the S&P/ASX 200 Index (ASX: XJO). Other platforms will let you trade on exchanges that operate all around the world.

Some online broking platforms are more tailored to casual traders, while others are more focused on servicing experienced and active traders. Generally, if you're just starting out, a platform designed for casual traders is all you'll need.

You'll also want to pick a platform that has reliable customer service. Ideally, their customer service team will be based locally in Australia. 

Full-service brokers

With a full-service broker, the broker does the trading for you. He or she can also advise you on what to sell or buy. A broker needs to have a reasonable basis for why they're recommending something to you, and they must tell you if they have any interest in the shares themselves.

The fees in these cases are a percentage of the trade value. Usually, you'll pay a lower percentage for larger transactions. 

For example, you may have a 2.5% fee on a transaction of up to $5,000. For a larger transaction, it may be just 0.1%. Because of this, small trades can end up becoming quite expensive.

It's also worth noting that most brokers will charge you a minimum fee.

Despite these costs, many people are happy to pay these higher transaction fees for the peace of mind of knowing they're receiving help from a professional. Others, however, enjoy the independence of being in charge of their own investments.

Sign up for an account

After selecting the platform you want to use, it's time to register for an account. Usually, this step is free to complete. However, some platforms might charge you a subscription fee or other ongoing fees. 

You can register online and will have to provide:

  • Your name, address, date of birth, and contact details
  • Your tax file number (TFN)
  • Linked bank account details
  • Proof of ID

You will then likely have to deposit a certain minimum amount of money in order to open your account. After your application has been processed and approved, it's finally time for you to start trading.

Pick the shares you want to purchase

Perhaps the most anxiety-producing part of trading is actually figuring out which shares to buy. Utilise the market research tools that your brokerage provides to find the best shares for your investment goals. 

Decide if you want shares that bring you value or growth. Many times, when it comes to trading shares, higher risks are associated with higher rewards. Those who are more risk-averse will want to pick shares of value over growth.

You'll also have to think about how many shares of a company you want to buy. This is going to come down to your investment goals and your budget.

It's important to remember that, unless you already own shares in a company, the minimum order size via the ASX is $500. So if you find a company that's worth $10 per share, you're going to have to purchase at least 25 shares. 

Place your order

Many novice investors tend to get tripped up when it comes to share order types. There are two primary options you need to know about when purchasing shares. You can either buy shares 'at limit' or 'at market.'

A limit order is when you set a maximum purchase price for your buy order. If the share you want to buy reaches that price, then your trade is automatically executed. This is ideal for people who want to buy shares of a company when the share price comes down, but they don't want to have to stare at their computer screens all day.

When you want to buy shares immediately at their current market price, then you'll want to place a market order.

Depending on the platform you use, you might also be able to use a variety of conditional orders. After you've entered all of the specifics of your trade, you'll get to review those details before finally placing the purchase order. 

Pay for the trade

In order to cover the cost of the trade, you'll need to have enough funds in your online share trading account. This includes having enough to cover the brokerage fees. 

The trade settlement period on the ASX is two business days. This is commonly referred to as T+2.

Monitor the performance of your shares

After you've purchased your shares, you're going to want to monitor their performance. If you have a long-term investing strategy, then you won't need to monitor them daily. Checking in on your share performance once or twice a month should be enough.

If you have a medium or short-term strategy, then you might want to check on your shares weekly or daily.

You can review the performance of your shares by logging into your trading account. Many platforms also offer mobile apps that you can review and trade from. 

Sell your shares (when you're ready)

Whether you're trying to raise cash or you're collecting profits, there's going to come a point where you'll want to sell your shares. Hopefully at a higher price than what you bought them for. 

The process of selling your shares is very similar to the purchasing process. You can choose to either sell them in a limit order or a market order. With a limit order, you can set a minimum sale price.

With a market order, you'll be selling shares at the current market price. 

Why invest in the ASX 200?

Prior to 2020, the ASX 200 has given investors annualised returns of around 10%, including franking credits and dividends. Assuming this trajectory continues, that means in 20 years, every $1,000 you invest will be worth more than $6,700. 

Not only is it worth investing in the ASX 200 for the long term, but it's also worth investing sooner rather than later. The longer you wait, the more likely you'll miss out on potential gains. 

Tips when buying shares on the ASX 200

Trading shares doesn't have to be for a select few. Everyone can benefit from the practice so long as they put in the time and effort. Let's go over some of the biggest tips to keep in mind when trading shares.

Do your research

The key to successful investing is making informed trading decisions. You'll want to research the financial health and growth prospects of companies you're interested in. Remember, it doesn't so much matter where the shares were but where they're going.

Read share prospectuses, look up research reports, go over annual reports, and see what the analysts are saying. 

Stay current with the Australian economy

You'll want to stay up to date with Reserve Bank interest rate decisions, investor confidence levels, the performance of share markets in Australia as well as the rest of the world, government policy changes, exchange rates, and the overall health of the national economy.

All of these factors can influence the overall market.

Start with blue-chip companies

Blue-chip companies are well-established, large corporations. Their share prices tend to move slowly, but they can provide good dividends and are a great way to get acquainted with the world of investing. 

Buy what you know

It may be tempting to purchase shares of a hot, new company that you've never heard of. But you'll be much better off buying shares of companies that you know and trust. You'll want to own companies that you interact with during your daily life.

The importance of learning investment 101

Investing in shares can be an exciting and fruitful long-term process. But before you jump into it, you'll first need to learn investment 101. Hopefully, after reading the above, you feel that you have the tools to start your investing journey.

Are you interested in becoming a successful and savvy investor? See how we can get you started on the right path today!