You've done your research and are itching to start your investing journey – but how exactly do you make your first trade? If you're unsure, never fear. In this article, we put all the pieces together and explain how you can start buying your shares.
If you're reading this article, we assume you've already digested your fair share of our education articles here at the Motley Fool Australia.
You probably understand the benefits of diversification. You can tell a value stock from a growth stock and know all about the magic of compounding. And now, the last thing left for you to do is take the plunge and buy some shares.
This article will take you through all the ins and outs of making your first share trade. Before reaching this point, make sure you've carefully considered your personal risk appetite and investing objectives.
Our investing education hub is an excellent resource for beginner investors – it can help you understand how the stock market works and choose the types of shares that best suit your financial needs.
So, you've done your homework and are now at the starting line of your investing journey. Let's cross it together.
Choosing which shares to buy
It's essential to have a clear sense of your investing objectives and risk appetite before making any trades because this will determine the type of shares that are right for you. Different shares offer different risk and return profiles, which makes them suitable for different investors.
For example, blue-chip and defensive shares will suit investors with a low-risk appetite who want to preserve the value of their portfolios. Investors looking for an additional income stream might want to invest in stocks with a high dividend yield. And investors with a longer time horizon who can afford to take on more risk might want to buy promising small-cap growth shares.
Once you've worked out the types of shares that can best help you achieve your investing goals, it's time to choose the specific companies you'd like to buy. There are many different ways you can approach this task.
Our article How to research stocks is also a fantastic read for newbie investors who want to understand the basics of stock analysis.
Fundamental analysis uses information about a company's financial performance to determine whether its shares are attractively priced. Technical analysts look for patterns in a company's share price movements and use this information to predict where it will move in the future.
Our preferred method here at the Fool is fundamental analysis. Because this method focuses on identifying the best value stocks, we believe it is the most dependable way for long-term investors to grow their wealth over time (and beat the market while they're at it).
Technical analysis is typically more for short-term traders who want to capitalise on tiny fluctuations in share prices.
When researching, knowing a few standard financial metrics, like the price-to-earnings (P/E) ratio and the price-to-book (P/B) ratio, is good. Check out our handy Investing Definitions page here for an AZ directory of Australia's most common financial metrics and terms and their meanings.
But it's not just about the numbers – you should also look beyond the financials at the company's leadership team, broader trends within its industry, and any competitive advantages it possesses.
ASX companies regularly publish their financial results, company updates and other announcements to the Motley Fool Australia and ASX websites, which you can use for your research. It's also relatively easy to keep updated with financial news and economic events from watching or reading the financial media.
But this doesn't mean you must be a full-time analyst to make share trades, either. Many great resources are out there already that can help you make sense of the financial markets and decide which shares to buy. We have free articles available right here at the Motley Fool Australia, and we also have member subscription services, like Share Advisor, that provide stock recommendations.
Placing your first trade
Before you make a trade, you'll need to open a brokerage account. There are many different brokers out there offering different levels of service.
Full-service brokers provide their clients with investment advice and other financial planning services in addition to simply executing trades (who also often charge pretty hefty fees). At the other end of the spectrum, discount brokers charge much lower fees, but generally for a no-frills service.
Discount brokers will suit investors who want to do independent research and make their own investment decisions. Many discount brokers have digital trading platforms that make it quick and easy for users to buy and sell stocks. A full-service broker will likely suit wealthier investors with more complex financial needs.
Find out more about brokers in our article How to choose a brokerage.
Once you've chosen a broker and opened an account, it's time to place your trade. There are a few different types of orders you can make. You can place a market order if the share market is open and you want to buy a share immediately at the current market price. This trade will execute immediately, but you must accept the current price.
Alternatively, you can place a limit order. You place this order in advance and can specify the share price you want to pay. If you place a limit order to buy a share, the order won't execute unless the share price drops to (or below) the price you're willing to pay. If the share price doesn't reach your limit price, the order won't execute.
Limit orders give you certainty about your price, which can be particularly helpful when the share market is volatile. However, they don't provide certainty that the order will go through – that depends on what happens to the company's share price.
Here's an example
Let's run through this process with a quick example.
Let's say you've researched, weighed up your risk and return objectives, and decided that shares in Woolworths Group Ltd (ASX: WOW) would meet your investing needs. Suppose you think Woolworths shares are reasonably priced and would like to execute your trade immediately (assuming the market is open). In that case, you can simply log in to your broker account and place a market order for the number of shares you want to buy.
However, you also recently read an analyst report suggesting a fair price for Woolworths shares is $35, a little less than the current price. You agree with the analyst report, so you don't want to pay the current market price (but still want to buy Woolworths shares).
In this case, you can place a limit order to buy Woolworths shares at $35. With a limit order, you can set the time you would like the order to remain valid (typically from one day up to a maximum of 20 business days). If the Woolworths share price doesn't drop to $35 within the timeframe of your limit order, the order won't execute.
Keeping limit orders open for longer makes it more likely that the order will eventually go through – but it does put the onus on you to keep up to date with company news to ensure you still agree with your limit price.
For example, let's say you place a limit order to buy Woolworths shares with a 20-day expiration date. In a week, Woolworths releases an earnings forecast update announcing a material downgrade in the company's profit outlook. If the share price drops significantly on the news (and you forget to cancel your order!), you could end up buying Woolworths shares for more than you would like to pay.
Building out your portfolio
Building a well-balanced portfolio takes more than one trade. It's always wise to diversify your investments so you don't put all your eggs in one basket.
Diversification means combining many different shares (or other investments like property and bonds) in one portfolio. You get the most significant benefit from diversification when you combine assets with opposing risk and return profiles. For example, adding some defensive shares to a growth-oriented portfolio can reduce your overall losses in a downturn.
Our philosophy here at the Fool is to embrace diversification. Try to build up 15-20 different shares in your portfolio as quickly as possible, ideally from various industries. This will likely reduce your portfolio's volatility in a downturn – and can help you more reliably grow your wealth over time.
And if buying 15-20 different shares quickly sounds tricky (and expensive!), consider buying units in an exchange-traded fund (ETF) instead. ETFs trade on the stock market like ordinary shares but are really pooled investment vehicles. The fund manager takes the money they raise from their investors to buy a portfolio of assets (usually other shares, but sometimes commodities and futures contracts).
Many different types of ETFs exist, including simple index funds. In an index fund, the fund manager buys all the shares in a particular index – like the S&P/ASX 200 Index (ASX: XJO), for example, the index of the largest 200 companies trading on the ASX.
So, if you buy a unit in the fund, you purchase the returns of the entire index. In other words, you get the diversification benefits of a portfolio containing 200 companies in a single trade!
Starting on your investing journey is an exciting event – it's the first step on your path towards a wealthier future! And, provided you have a good understanding of your own personal risk and return objectives, it doesn't need to be a nerve-racking one.
Once you've opened your broker account, placing a trade is a relatively straightforward process, and you can choose whether you want to take the current market price or offer your best price by placing a limit order. Remember, not all our investments will be winners, but if we diversify our portfolio, we can reduce their impact on our overall returns.
Our philosophy here at the Fool is that investing is a long-term game. And we believe that building a diversified, well-balanced portfolio is the most surefire way to beat the market over time. That also means that the earlier you start building your portfolio, the better your chances of success.
So, take the plunge today – your future self will thank you for it!