How to invest in shares: A beginner's guide

Ready to start investing in the share market but not sure of the first steps to take? We've got you covered.

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If you've already decided you want to start investing, congratulations! Beginning your investment journey is an exciting time. It means you're on the road to building your wealth. 

There can be a lot to consider when you first start investing, so we've broken it down into steps. These include how to invest, when to start, understanding your goals and risk tolerance, choosing investment strategies, and more. 

Investing for beginners

Investing in shares is one of the surest ways of increasing your wealth over the long term. However, many people hesitate to start because stock market investing can seem intimidating and confusing. 

This doesn't have to be the case. Once you've mastered the basics, you'll see that it is relatively straightforward and can lead to substantial long-term rewards. Below, we have set a step-by-step guide to investing for beginners in Australia, which will take you through the basics.

1. Make sure you're financially ready to invest

All else being equal, the best time to start investing is right now. The longer you allow your returns to compound, the more your money should grow. That said, you should ensure your financial house is in order before you take the plunge into the stock market. 

To enable your investment dollars to work as effectively as possible, make sure you are not carrying any high-interest debt, such as credit card debt, and have sufficient funds to meet your needs in an emergency. 

Pay off high-interest debt 

In nearly every set of circumstances, the best use of your cash is to pay down high-interest debt (rule of thumb: interest 10% or higher). For most people, that means credit card debt. It's easy to underestimate the power of compound interest combined with time.

A 20-year-old lucky enough to invest $10,000 and achieve the historical stock market average of 10% yearly returns would be a millionaire before age 70. That's multiplying your money by 100!

Unfortunately, that maths works the same way in reverse. If you accrue 10% interest, $10,000 in credit card debt becomes $1 million before age 70. Making the required repayments will prevent the debt from spiralling out of control, but it is essential to minimise this type of debt. 

You could consider transferring your balance to a card offering an interest-free period or obtaining a personal loan to lower interest expenses. 

Establish an emergency fund 

Stuff happens – stuff that requires money to fix. (Think job loss, car issues, medical bills, or anything else that Murphy or life throws your way.) If you don't have money on hand, you'll have to improvise to make ends meet, which could mean patching over a problem with an expensive solution like a credit card (see above) or worse.

That's why everyone should have an emergency fund – a cash hoard you can raid if unexpected expenses arise. Your emergency fund needs to be readily accessible in a high-yield savings account. Don't expect to make a killing on this investment. 

The interest on most savings accounts these days won't keep up with inflation – but the peace of mind an emergency fund brings is priceless. 

2. Understand your investment goals

Another essential thing to do before you start investing is to get a general sense of 'who you are' as an investor. There are a few important questions to ask yourself, such as:

Why are you investing? Your reasons for investing can significantly influence your investment style, risk tolerance, and more. Suppose you're saving for retirement. In this case, you will probably be less inclined to take risks than someone with a substantial nest egg in their superannuation account and is simply investing to make additional money. The same can be said if you invest for a specific goal, such as to pay for your kids' education.

What is your risk tolerance? Assessing your risk tolerance is more of a personality question. Are you a risk-taker willing to ride out some turbulent share price moves to achieve better long-term returns? Or would large swings in the value of your portfolio make you nauseous?

There's tremendous variety within the share market when it comes to risk. For example, an Australian share like Commonwealth Bank of Australia (ASX: CBA), which has a long track record of profitability, and a young but high-potential share like WiseTech Global Ltd (ASX: WTC), represent two different ends of the risk spectrum.

What is your investment priority? This is another question that can help you choose share investments that are right for you. For example, if you want to grow your wealth, you don't necessarily need to focus on dividend-paying shares. On the other hand, if you plan to rely on your investment portfolio for income, you may want to focus on high-dividend investments only. 

An investor whose main priority is long-term growth might choose an exchange-traded fund (ETF) like the Vanguard Diversified High Growth Index ETF (ASX: VDHG), which has a 90% allocation toward growth assets and 10% to income-generating assets.

On the other hand, an income-reliant investor might choose the Vanguard Australian Shares High Yield ETF (ASX: VHY), which aims to provide exposure to companies with higher forecast dividends relative to other ASX-listed companies. An investor who falls somewhere in the middle might choose the iShares Core S&P/ASX 200 ETF (ASX: IOZ), which tracks the S&P/ASX 200 Index (ASX: XJO).

How much time do you want to spend on investing? The answer to this question will tell you whether you should buy individual ASX shares or focus on ASX ETFs. 

ETFs provide automatic diversification and exposure to both Australian and international shares. Investing in an index fund is an excellent way to get cost-effective exposure to the performance of the share market as a whole. There is a wide variety of ETFs listed on the ASX, meaning investors also have the opportunity to invest in specific market sectors in line with investment themes.

If you want to choose individual stocks, we encourage you to do so. However, there's a caveat. You must commit enough time to thoroughly and effectively evaluate the shares before buying them. At a minimum, we'd suggest only investing in individual shares if you have at least a couple of hours each week to learn about stock market investing and evaluate potential investment opportunities.

3. Choose an investing strategy

Your investment strategy can be a crucial differentiator, setting successful investors apart. Your strategy is an action plan that helps you choose suitable investments for your financial situation, goals, and risk tolerance. It will guide any investment decision and be influenced by your individual circumstances.

Depending on your investment strategy, you may follow the tenets of value investing to identify undervalued ASX shares. You could also focus on investments with high growth prospects to make a capital gain or those with a strong dividend track record to secure regular dividend payments. 

You may decide to invest according to environmental, social and corporate governance (ESG) principles, typically referred to as ESG investing. This involves taking social and environmental factors into account in your investment decisions. 

Different investment strategies can suit different investors and market conditions. Active strategies require more input from investors, while passive investing requires less. Regardless of which approach you use, there are some basic investment principles you can follow to optimise your journey: 

  • Invest consistently: Try to make it a habit to set money aside to invest regularly. This creates momentum, which can supercharge long-term returns. 
  • Diversify: Diversification is the practice of investing in different market sectors and asset classes. This can act as a hedge against volatility.
  • Have a long-term time horizon: Investing is about setting yourself up for the future, not getting rich quickly. Holding on for the long haul will allow your returns to compound over time.
  • Keep learning: Make sure you understand what you are invested in. You can't expect to know everything overnight, but you should work towards expanding your knowledge – and wealth – over time. 

4. Determine how much money you need to invest

First, let's talk about the money you shouldn't invest in ASX shares. The share market is no place for money you might need within the next five years.

While the stock market will almost certainly rise over the long run, there's simply too much uncertainty in share prices in the short term – a drop of 20% in any given year is not unheard of. A recent example is the COVID-19 pandemic in early 2020, which saw the ASX 200 plunge more than 30%. The market then recovered almost half of that loss within a few months.

The funds you invest in the share market need time to generate returns, whether through dividends or capital gains. So, if you need money to make mortgage repayments, pay tuition fees, or for a home deposit or a wedding, this is not the money to put into the stock market.

Assuming you have these bases covered, you'll need to think about how to allocate your excess funds. The share market is just one investment option. It is also possible to invest in fixed-income securities like bonds or property via real estate investment trusts (REITs). Balancing your money between different classes of assets, such as shares, bonds, and property, is known as asset allocation. 

5. Open a brokerage account

To buy and sell shares or ETFs, you'll need a brokerage account, which enables you to trade on the market.

These accounts are offered by companies such as CommSec, nabtrade, Selfwealth Ltd (ASX: SWF), CMC Markets PLC (LON: CMCX), Stake, and many others. Opening a brokerage account is typically a quick and painless process. You can easily fund your brokerage account via BPAY or bank transfer.

With a few forms of ID at the ready, you should consider a few things before choosing a particular broker:

Which type of account?

First, determine the type of trading account you need. For beginner investors, this means choosing between full-service and discount brokerage accounts. Both account types will allow you to buy ASX shares, ETFs, and some managed funds

The primary consideration here is how much additional support you want. If you want easy access to research on individual companies, tailored investment plans, or the opportunity to participate in initial public offerings (IPOs), a full-service brokerage account would be the way to go.

On the other hand, if your goal is to take control of your investing and build up your knowledge without relying on the support of a broker, a discount or online investment platform might suit you better.

Compare broker costs and features

Brokerage fees for buying and selling shares vary between the different types of brokers. Full-service brokers typically charge higher fees than discount or online brokers. Some online brokers have even started eliminating trading commissions but may charge fees for trading shares in different currencies.

There are other significant differences, too. For example, some brokers offer customers a range of educational tools and portfolio-tracking features that can be useful for newer investors. Others provide the ability to trade on overseas share markets.

Another consideration is the user-friendliness and functionality of the broker's trading platform. Some are more 'clunky' than others. Most brokers feature examples of their user platform on their websites. With brokers that offer a trading app, it's a good idea to check the user reviews in the relevant app store before signing up.

6. Research ASX shares

Now that you know how to choose a broker, it's time to start thinking about which shares to buy. Buying the hottest high-growth shares may seem like a great way to build wealth (and it certainly can be), but we, Motley Fools would caution you to hold off on these until you're a little more experienced. It's wiser to create a 'base' for your portfolio with rock-solid, established blue-chip ASX businesses first.

To invest in individual shares, you should familiarise yourself with some basic evaluation methods. Our guide to value investing is a great place to start. In that article, we help you find shares trading at attractive valuations. If you want to add some exciting long-term capital growth prospects to your portfolio, our guide to growth investing is a great first reference.

It's a good idea to learn the concept of diversification, which means you should have various types of companies in your portfolio. However, you don't need to go overboard. Stick with businesses you understand. If it turns out that you're good at (or comfortable with) evaluating a particular type of business, there's nothing wrong with one industry making up a relatively large segment of your portfolio.

7. Buy your ASX shares 

Enter your purchase order through your broker. Once your purchase has settled, you are a shareholder! But the journey doesn't end there. The most successful investors continue to learn and invest throughout their lives. To start you on this journey, here are some of the best investing lessons you can learn: 

  • Long-term investing is the best way to go: The share market has historically generated total returns of about 10% annually. But over the short term, it is a different story. Even relatively stable companies can see their share prices fluctuate from day to day, which is why trying to time near-term movement is very difficult.
  • Look at market crashes and corrections as opportunities: Nobody likes to watch the value of their investments plunge. Market crashes can be scary, but they are also the best long-term opportunities.
    If you're investing for the long run, the right way to look at share market corrections and crashes is like a sale at your favourite store. If you were shopping and suddenly heard an announcement that everything in the store was 25% off, would you panic and run away? Of course not! So, why would you avoid the share market when the same situation occurs?
  • Don't be afraid to sell if something changes: Even though long-term investing is the best way to own shares, that doesn't mean you have to hold every share you buy for decades, no matter what. Stick with companies while they fit your investment strategy, but if circumstances change, be prepared to reevaluate. 
  • Don't invest in a business you don't understand: It may be tempting to purchase shares of a hot, new company with good media buzz. But until you have some experience, you're much better off buying shares of companies you know and trust, including those you interact with daily. As a general rule, if you can't clearly explain what a company does, how it makes money, and how it could grow in a few sentences, you should think hard about whether to invest in it.
  • Don't follow the crowd: As human beings, our emotions often get the better of us, and that's especially true with investing. When we see all of our friends making money on the latest 'it' stock, we want to throw our money in, too. Conversely, when we see commentators on TV panicking and share prices falling, that's when we're inclined to sell. It's common knowledge that the main idea of investing is to buy low and sell high, but our instincts compel us to do the exact opposite. In fact, most investors underperform the market over time, and being too reactionary to news and making emotional investing decisions are big reasons why.

Learning about investing is a lifelong process

How does Warren Buffett, one of the world's most successful investors, spend his time? He doesn't spend it in meetings or on calls. Instead, he uses the bulk of his time sitting alone in his office and reading. 

"Read 500 pages like this every day. That's how knowledge works. It builds up, like compound interest," Buffett says.

There is nobody on this planet who knows everything there is to know about share investing. But if you want to become the best share investor you can be, you must treat learning about investing as a lifelong process.

Frequently Asked Questions

Start by educating yourself about the stock market and setting clear financial goals. Create a budget for investing and begin with a small, manageable investment amount. This allows you to gain experience without substantial exposure to risk. Remember to diversify as you grow your portfolio and become more confident in your investment decisions. 

Timing for new investors isn't about market fluctuations but personal financial readiness. Before buying stocks, it's essential to ensure your financial stability. Pay off high-interest debts and build an emergency fund first so you don't need to access your invested money in the short term. Stock market investments are best suited for long-term wealth building, so aim to invest for five years or more.

First, determine your financial goals and investment approach to investing in ASX shares. Next, review your budget to determine how you will fund your investments. Then, open a brokerage account with a provider like CommSec or nabtrade. Select shares or funds that align with your investment goals, and begin your investment journey focusing on long-term growth.

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.

Motley Fool contributor Katherine O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended WiseTech Global. The Motley Fool Australia has positions in and has recommended WiseTech Global. The Motley Fool Australia has recommended Vanguard Australian Shares High Yield ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.