Beginner’s guide to the stock market
While your image of someone investing in the stock market may involve a sleek haircut or a suit from the 80s, normal people are using the ASX to make a lot of money. Investing in shares gives you the chance to earn better returns than if you left your money in a bank account, but while these rewards are great, so are the risks. We take a look at both in this beginner’s guide.
What is a share?
In basic terms, a share represents a single unit of ownership of a company. Anyone can buy or sell shares of companies that are listed on the Australian Securities Exchange (ASX), and when you buy shares in one of these companies you effectively own a small part of the business.
People who make money by investing in shares generally make it by selling shares when they are more expensive than the moment they bought it (known as capital growth or capital gain), or a dividend payment, which is a share of the company’s profits issued to investors.
Where do I start?
Well, if it were easy everybody would be doing it! First things first, you need to do your homework. Share prices are not just based on a company’s financial performance, but are often a reflection of investor opinion regarding the actual value of the company. The worst thing you can do as a first-time investor is jumping into the market without a thorough understanding of how it works and the external forces (anything from interest rates to weather) moving share prices up and down.
How much do I need?
There’s no definitive answer here, but it would probably best to start small if you’re a first time investor. People should set goals and save for their initial investment. The ASX suggests you should, “start your share investing with at least $2,000” as a general rule of thumb, but this is purely a guideline and you shouldn’t feel obliged this invest this much money if you can’t afford to lost it.
Finding a broker
Buying and selling shares isn’t as simple as going up to a counter at the front of the ASX with a wad of cash. You will need to find a broker to conduct the transaction and there are two main types – those that offer advice and those that don’t. Full service brokers offer financial advice and will help you decide what to buy and sell and provide investment advice for you and your money, whereas no advice brokers are simply there to execute your buy and sell orders in the market.
What sort of shares am I looking for?
One thing you should definitely ask yourself before you start investing is what you want to achieve out of your investment, and what success will look like to you. The more money you invest the more money you stand to gain, but it also means more of your money is exposed to risks and the stock market is by no means a static monster. It’s important to have a very real conversation with your partner/dependants and figure out how much you are willing to spend and what success looks like.
Diversify
A common mistake first time investors make when they’re trying to invest in the stock market is putting all their eggs in one basket, or investing all your money in companies that are similar to each other. Spreading your investment out over a range of different industries is the best way to ensure that your money is hedged against any market forces that may be out of your control.
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