Investing in the stock market is something that I personally believe that everyone should know how to do. So I am going to go through exactly what you need to do, to be able to start investing in shares on the Australian Stock Exchange (also known as the ASX). Please note though, that these tips should be transferable to any type of stock market investing.
While it is relatively easy to get started with investing in shares, there is a lot to know for a beginner. So with that in mind I will try to spell out as much as possible and if that means this post is quite long or broken up into multiple parts, then so be it.
Share Market Investment Strategies
The very first thing you need to do is to work out is how you plan on playing the market. There are two main types of people who get into the stock market, and they can be broadly put into the following categories:
Traders – Share traders are interested in buying and selling a stock within a fairly short time period. They are mainly interested in making lots of small returns and locking in profit when it is available, and cutting losses when things go bad. The majority of traders buy and sell shares based on technical analysis rather than fundamental analysis (if you don’t know what that is, don’t worry, i’ll explain the difference soon).
Investors – Investors tend to buy and hold a stock for long periods of time expecting both dividends and capital growth. They don’t tend to do a lot of buying and selling and will often hold onto their shares through the bad times expecting them to return to profit in the long run.
Obviously this is a simplified view of the world, and it isn’t to say that you can’t do both share trading and investing, but you need to determine which one fits you better and which is your preferred method as that may impact the stock broker that you end up selecting.
What is the difference between Fundamental analysis and Technical analysis?
Honestly, this is a massive topic in itself and a little bit off topic for this post, but briefly the differences is as follows:
Fundamental Analysis – When looking into fundamental analysis you are interested in things like the companies earnings over the last 1,5 and 10 years. What type of dividend payout can be expected, what the future earnings growth looks like. The companies debt position and management board capabilities. It is very much based around is this a good company and will it continue to be a good company into the future with good growth prospects.
As an example, a company that specialises in creating black and white TV’s might not have great future earnings potential as there isn’t all that much call for that product any longer. Where as a company that has a drug to cure cancer should expect a nice rise in share price.
Technical Analysis – A friend of mine calls this “chickens feet” referring to the practice of witch craft and trying to predict the future. Essentially with technical analysis you are looking at what the companies chart looks like and if the indicators are saying it is going to go up or down. Often you will find a lot of traders do this over investors as it can be a great way to trade penny stocks (A penny stock is a stock with a small share price) as you can make large gains and piggy back on a stocks momentum.
The best way I can describe this is heard mentality. If everyone starts running one way, you are immediately interested in why that is the case. You can either run with them, stand on the side or run against them and get trampled. Technical analysis is similar, and it only really works because everyone follows similar methods and so it becomes a self for filling prophecy in a way. No matter what people tell you, technical analysis is real, and being able to read charts well can make you a fortune, but again, you have to know what to look for and know when to get in and out.
Finding a Good Stock Broker
OK, hopefully you have determined your investment strategy and so now you need to find a decent broker so you can start buying and selling stocks for big profits 😉
There is a good list of brokers on the ASX website which you can find here. However, most banks will offer you an online share trading platform which you can use, and while the brokerage charges are likely higher than a dedicated broker, it isn’t a bad way to start out and get your feet wet in the share market.
My general rule of thumb if you are going to be a trader, is that you are looking for a broker that has low brokerage fees per trade. Fees can really add up fast if you are entering and exiting shares regularly and that is only going to eat into your profits.
If you have decided that you are going to be an investor, then you probably aren’t all that interested in brokerage fees, but are more interested in what information and broker reports are going to be available to you to help with your long term investment strategies.
**Remember – You have to pay brokerage every time you buy and sell shares, and some brokers charge a flat fee or a percentage of the total buying/selling value. So make sure you read the fine print. Most banks charge between $20and $30 per trade for purchases and sales under $10,000. If you exceed $10,000 then often a percentage of the value will be charged as your brokerage fee. If you have more than $10,000 to invest, check out my What is the best way to invest $10,000 page.
How to Buy Shares
Once you have your account all sorted through your broker, you then need to fund your account with money. I’m not 100% sure on this, but I think you need at least $500 as a minimum parcel of shares for online trading on the ASX, plus you will need enough money to cover the brokerage fee for buying the stock.
Buying shares in your online account is simple and can be broken down to the following steps:
- Pick the stock you want to invest in (as an example NEU). Note: All stocks on the ASX have 3 characters, with some stock options having more than 3 characters.
- Choose the price than you want to buy at and the number of shares that you want to buy. Note: In this account you can select to buy a set quantity, or a set value. I have taken screencaptures of both. Also note that you can set the price you want to buy at as per the screen capture below where I set it to 11 cents or $0.11.
You can also choose to buy “At Market” which will take the next share in the sell queue – in this case it would be $0.12.
When ready and happy with everything, proceed to the confirmation page.
- Confirm and submit the order.
What happens if you choose the $0.11 option in my example above rather than the at market option?
The answer is that your order will sit on the market at $0.11 until it is cancelled based on the expiry time you set on the order form, or until someone sells enough shares that your order gets filled. If you want to make sure you get your shares then you should tick the at market box and you will place your order at the lowest available price that someone is selling.
What happens when you place an order that is larger than what is available for sale?
In the example above there is 1,017,655 shares for sale at $0.12. Should you place an order for 1,200,000 shares at $0.12, then you will only buy 1,017,655 of them. The remaining 182,345 shares that you want would sit in the buy queue at $0.12 until someone sells into them. If you wanted to gaurentee that you got your entire order of 1,200,000 shares gets filled, then you would need to place your order at 0.125. In this case you would buy 1,017,655 at $0.12 and 182,345 at $0.125.
I hope you enjoyed this as that’s the end of How to Invest in Shares in Australia, but there will be a part 2 where I will talk about selling shares, the different indexes, options, share purchase plans, company announcements, market depth, charts, best shares to buy and more. Stay tuned.