How to Invest in Shares: A Beginner’s Guide for Getting Started

How to invest in ASX shares: A beginner's guide for getting started

If you are ready to start investing in the share market, but aren't sure of the first steps to take, you’ve come to the right place.

There's quite a bit you should know before diving in. Here's a step-by-step guide to investing money in the share market to help ensure you do it the right way.

First time buyer of shares represented by child in suit reading asx share price charts
Image source: Getty Images

Why ASX shares?

It might surprise you to learn that a $10,000 investment in the S&P/ASX 200 Index (ASX: XJO) 10 years ago would have more than doubled to be worth $25,000, including dividends, today. 

Even better, $10,000 invested in the S&P 500 Index (INDEXSP: .INX) 50 years ago would be worth nearly $1.2 million today. Share investing, when done well, is among the most effective ways to build long-term wealth. We’re here to teach you how with our step-by-step guide:

  1. Determine your investing approach
  2. Decide how much you will invest in shares
  3. Open a brokerage account
  4. Choose which shares to buy
  5. Buy and continue investing.

Step 1: Investing approach

The first thing to consider is how to start investing in shares. Some investors choose to buy shares in individual companies, while others take a less active approach.

Try this. Which of the following statements best describes you?

  • I'm an analytical person and enjoy crunching numbers and doing research
  • I hate maths and don't want to do a tonne of ‘homework’
  • I have several hours each week to dedicate to share market investing
  • I like to read about the different companies I can invest in, but don't have any desire to dive into anything maths-related
  • I'm a busy professional and don't have the time to learn how to analyse shares.

The good news is that regardless of which of these statements you agree with, you can still become a share market investor. The only thing that will change is the ‘how’.

The different ways to invest in the ASX share market

  • Individual shares: Investing in shares of individual companies requires time and dedication. This is because you need to thoroughly research and monitor the shares on an ongoing basis. If you’re up for it, we 100% encourage you to do so. It is entirely possible for a smart and patient investor to beat the market over time. On the other hand, if things like half-year earnings reports, annual general meetings and moderate mathematical calculations don't sound appealing, there's absolutely nothing wrong with taking a more passive approach
  • Index funds: In addition to buying individual shares, you can choose to invest in index funds that track a share index like the ASX 200. When it comes to actively vs. passively-managed funds we generally prefer the latter (although there are certainly exceptions). Index funds typically have significantly lower costs and are virtually guaranteed to match the long-term performance of their underlying indexes. Over time, the ASX 200 has produced total returns of about 10% annualised when adding in dividends, and a performance like this can build substantial wealth over time
  • Robo-advisors: Another option that has exploded in popularity in recent years is the robo-advisor. A robo-advisor is a brokerage company that essentially invests your money on your behalf in a portfolio of index funds that is appropriate for your age, risk tolerance, and investing goals. Not only can a robo-advisor select your investments, but some can also optimise your tax efficiency and make changes over time automatically.

Step 2: How much to invest in ASX shares

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

While the share market will almost certainly rise over the long run, there's simply too much uncertainty in share prices in the short term – in fact, a drop of 20% in any given year isn’t unusual. In 2020, during the COVID-19 pandemic, the ASX 200 plunged by more than 30% before quickly recovering almost half of that loss within just a few months.

Money you shouldn't invest in shares includes:

  • Your emergency fund –three to six months’ of living expenses 
  • Money you'll need to pay your child's next school or university tuition fee
  • Next year's holiday or your wedding fund
  • Money you're saving for a home deposit, even if you are not intending to buy a home for several years.

Asset allocation

Now, let's talk about what to do with your investable money – that is, the money you won't likely need within the next five years. This is a concept known as asset allocation, and a few factors come into play here. Your age is a major consideration, as is your particular risk tolerance and investment objectives.

Let's start with your age. The general idea is that as you get older, shares gradually become a less desirable place to keep your money. If you're young, you have decades ahead of you to ride out any ups and downs in the market, but this isn't the case if you're retired and reliant on your investment income.

Here's a quick rule of thumb that can help you establish a ballpark asset allocation. Take your age and subtract it from 110. This is the approximate percentage of your investable money that should be in shares (this includes mutual funds and exchange-traded funds (ETFs)  that are share-based). The remainder should be in fixed income investments like bonds or high-yield term deposits. You can adjust this ratio up or down depending on your particular risk tolerance.

For example, let's say that you are 40 years old. This rule suggests that 70% of your investable money should be in shares, with 30% in fixed income. If you're more of a risk taker or are planning to work past a typical retirement age, you may want to shift this ratio in favour of shares. On the other hand, if you don't like big fluctuations in your portfolio, you might want to modify it in the other direction.

Step 3: Open a brokerage account 

All of the advice about investing in ASX shares for beginners doesn't do you much good if you don't have any way to actually buy shares. To do this, you'll need a special type of account called a brokerage account.

These accounts are offered by companies such as CommSec, nabtrade, Selfwealth, and many others. Opening a brokerage account is typically a quick and painless process. You can easily fund your brokerage account via BPAY, or by bank transfer.

With a few forms of ID at the ready, opening a brokerage account is generally easy, but you should consider a few things before choosing a particular broker:

Type of account

First, determine the type of brokerage account you need. For most people who are just trying to learn about investing, this means choosing between a full service brokerage account and a discount brokerage account. Both account types will allow you to buy shares, mutual funds, and ETFs. The main 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), you'll probably want a full service brokerage account.

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 broker might suit you better.

Compare costs and features

Brokerage fees to buy and sell shares can vary widely between the different types of brokers. For example, full service brokers typically charge higher fees than discount or online brokers. Some online share brokers have even started to eliminate trading commissions altogether, but may charge fees for trading shares in different currencies.

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

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

Step 4: Choose your ASX shares

Now that you know how to choose a broker, it’s time to start thinking about which shares to buy.

Of course, in just a few paragraphs we can't go over everything you should consider when selecting and analysing shares, but here are the important concepts to master before you get started:

  • Diversify your portfolio
  • Invest only in businesses you understand
  • Avoid high-volatility shares until you get the hang of investing
  • Avoid speculative micro-cap shares or ‘penny stocks’
  • Learn the basic metrics and concepts for evaluating shares.

It's a good idea to learn the concept of diversification, which means you should have a variety of different 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.

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’ to your portfolio with rock-solid, established blue-chip ASX businesses first.

If you want to invest in individual shares, you should familiarise yourself with some of the basic ways to evaluate them. Our guide to value investing is a great place to start. In that article, we help you find shares trading for attractive valuations. And if you want to add some exciting long-term growth prospects to your portfolio, our guide to growth investing is a great first reference. 

Step 5: Buy and continue investing

Here's one of the biggest secrets to investing, courtesy of the Oracle of Omaha himself, Warren Buffett. You do not need to do extraordinary things to get extraordinary results. (Note: Warren Buffett is not only the most successful long-term investor of all time, but also one of the best sources of wisdom for your investment strategy).

A surefire way to make money in the share market is to buy shares in great businesses at reasonable prices and hold them for as long as the businesses remain great (or until you need the money). If you do this, you'll experience some volatility along the way, but over time, you'll see excellent investment returns.


How do I invest $100?

If you have $100 to invest, here are our 4 best suggestions:

  1. Start an emergency fund
  2. Invest in a share market index fund or ETF
  3. Use a broker that offers fractional share purchases to buy shares
  4. Use a micro-investing app or robo-advisor.

How do I open a brokerage account?

Here's your step-by-step guide for opening a brokerage account:

  1. Determine the type of brokerage account you need
  2. Compare the costs and incentives
  3. Consider the services and conveniences offered
  4. Decide on a brokerage firm
  5. Fill out the new account application form 
  6. Transfer money into the account
  7. Start researching investments
  8. Buy!

What is the ASX 200?

The ASX 200 is an Australian share market index made up of the 200 largest companies listed in Australia by market capitalisation.

The ASX 200 is an important benchmark for the performance of the Australian share market and is closely followed by investors. You can discover more about the ASX 200 and how it works here.

Article last updated May 2022. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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