A Beginners Guide To Investing In Shares In Australia
Across the world people invest in all sorts of ventures and businesses. The draw of investing can be inescapable, with stories of overnight fortunes to terrible losses being known by all. To the first time investor, it can all seem a bit much as investing is quite a daunting prospect especially due to the glamorisation of Wall Street. However, for most investors it isn't about making huge amounts of money in risky ventures. Instead, most people look to increase their capital through smart investments that will increase in value over time.
What Is A Share And How Do I Buy One?
How can you go about buying and selling shares in Australia?
A share is one-part ownership in a company. If a company has 100 shares, then 1 share means you own 1% of the company. Companies such as Westpac, Coles and BHP Billiton list their stocks on the stock market or Australian Securities Exchange (ASX) for purchase. There are over 2000 companies listed on the exchange that you are able to partly own when you purchase their shares. A third party known as a 'broker' acts for you in buying and selling shares. Brokers can be found independently or can be found through your bank which will usually have online services that making investing easy.
How Do Shares Make Me Money?
The benefits of purchasing shares
Shares can make you money in two ways, both of which can work in tandem or independently.
Increased share prices – this is where the price of the shares increases from when you brought them. You are then able to sell the shares at a profit which is known as capital gain or capital growth. It is important to remember that this can work the other way, with your shares being worth less than the price you brought them for. If you sell them when they are worth less than what you brought them for you will lose money.
Share in the company’s profits – These payments are a portion of the company’s profits paid to you as part owner in the company. Known as dividends, this is usually paid out twice a year. Companies are not required to pay dividends but many do as a way of rewarding shareholders.
Savings Accounts – Safer Option?
What option is better for me?
Keeping your money in a savings account is a safer option and you should always make sure that some of your capital remains in a savings account. However, by investing in shares you are able to make a better return than you would if you left all your money in a savings account. Generally, the average return is higher from investing in shares than leaving your capital in your savings account. A report by the ASX and Russell Investments showed that cash investments made people an average 3.7% return per year while share investments made a 9.2% return a year.
First Steps Of Investing In Shares
How to begin investing in shares in Australia
It is important that you consider what you want to invest in and work out a strategy for your investing to avoid making irrational or ill-advised decisions down the track. This is where a financial adviser can help, giving you advice on where to best invest your money based on a number of factors personal to you. Ask yourself; how long do I want to invest my money for? How much do I want to invest? And will I continue to make regular contributions to my investment portfolio?
It's important that if you are handling your investments yourself that you have a good understanding of the economy, interest rates, exchange rates and government policy. Understanding the stock market can also help give you a better understanding of the types of companies you might want to invest in.
How Much Do I Need To Invest?
How much risk should I take when investing in stocks
There is no minimum or maximum amount you need to invest. Many people can be put off by investing large amounts early on. However, you should only invest what you are comfortable with and what you can afford. Each broker will have their own minimum amount for investment, usually around $500. The ASX suggests an investment of around $2000 which can seem like a lot but with proper investments, shouldn't be too much of a risk.
When you buy or sell shares there are fees that the broker will charge and depending on how much you invest, this could be a small or larger percentage of the investment. The brokers fee will usually be the same no matter how much you invest, but it’s important to look at the percentage of the fee compared to how much you are investing. So if you invest a small amount, the company you invest in will have to return a larger profit to cover the costs of the investment.
You also need to be comfortable with the possibility of losing money. The more money you invest; the more money you are able to lose from the investment. Especially with risky ventures, the amount you are willing to lose should be considered.
How To Choose Which Shares To Invest In
Which are the safest shares for a first time investor?
There a number of ways to choose a business you want to invest in and there are a lot of tips and resources to help you choose the right investments. MoneySmart, the government guide for investing, suggest that you put your money into a company which is in an industry that you know something about, making it easier for you to understand if a company is doing well.
The least risky investments are usually the top fifty largest companies on the ASX and these are usually a good place for first-timers to start. Most of these businesses are long-established and deliverer a steady return to shareholders. They are referred to a blue chip shares.
Past financial performance and achievements can be good indicators of how stable a business is. But the most important thing to look at is a company’s future prospects. Look at the business and ask, will the goods or services offered by the company continue to be in demand in the future? Can the company grow? Who are the competitors and are they in a stronger position? A company’s annual report and financial reports can be a good place to start when considering investment option. These can be found on the ASX website.
The Right Way To Invest
Don't be fooled by penny stocks or negligent financial advisers
When considering investing for the first time, it is a good rule to stay clear of low priced stocks. Investing in these 'penny stocks' is a quick way to lose a lot of money. Investing $1000 in 20c shares is not a quick way to make a lot of money. Investing in less shares at $50 a piece is often a smarter idea. It matters more about how much the shares are worth when you sell rather than how many you own.
It’s also not a good idea to buy shares just because of the falling price. A company may have damaged its future ability to make money, causing prices to fall. Look at the past share prices and figure out if the price has been falling for a long time.
Companies share prices usually rise when they make a positive announcement for their future such as a contract for new business, a profit forecast or a sales outlook. If a share price rises to quickly and the business is unable to deliver on their promise, the share prices could quickly plummet again. Consider price along with a range of other factors before choosing the right investment for you. View the Australian Securities Exchange website for more information and investing tips.
How Much Can I Afford To Lose?
Make sure you don't stretch your finances to far when investing
When first considering investing, make sure you have a good idea of how much you are willing to lose. Selling decision are just as important as what you choose to buy to your overall result. People often invest in shares but are not sure how to sell. It’s a good idea to make sure you have a percentage value set for how much you are willing to lose, e.g. if the price falls below 10% of the original value, you sell to avoid potential further loss. Knowing when an investment has gone bad is crucial for a successful investment. Not knowing when to pull out of an investment can ruin the gains across your other investments. Financial advisers can be helpful here in guiding you through the purchasing and selling of shares.
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