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Ah, the romance of the stock market! For many people share trading often calls to mind images of stressed-out stockbrokers screaming from a crowded trading room floor and high-fliers swanning around in expensive clothes but the truth is anyone can invest in shares – and make money on them. The art is picking what to invest in and when…
What is a “share”? Shares explained
When a company is listed on the stock exchange it is divided into little pieces called shares. Individual investors may not have the money to buy the whole company but now they can buy some of those little pieces of it. As a private business no-one but the owners can benefit from ownership of the company. As a publicly listed company many people can access the risk of running the business but also the profits.
Share price movements
The share price rises and falls, depending on the market as a whole and anything that may effect the reputation or prospects of the company. Examples of such events can include a recall of products or a takeover, which may bring the price down, or a merger with another reputable company, which may bring the price up.
Profit projections – educated “guess-timates”
Shares are given a value based on company profits, or rather, expected future profits. Analysts have a myriad of ways that they can project a company’s future earnings, either by investigating the current financial health of the company, or by going into a more detailed analysis of the company’s cash flow, profits and ability to return dividend payments to investors.
This essentially means that a lot of share trading is based on future projections. This makes share trading both risky and exciting. The golden rule, of course, is to buy at a lower price than you sell at.
Shareholder voting
As a shareholder, you “own” a little piece of the business – so you have other rights as well, such as being able to vote shareholders’ meetings. The more shares you have purchased, the more significant your vote will be in influencing the outcome.
Buying shares: getting started
One of the golden rules of investing is: diversify. What that means is invest across a wide range of companies, sectors, even countries, to spread your risk. Don’t put all your money into property or Telstra shares, for example. If there is a share market crash then it’s probably going to hit one or two sectors harder than others. You may lose in those sectors but if you have money invested in other areas these “diversified” investments might help to balance your losses by dropping less or even making money.
Managed funds
The most common way to do this these days is to buy into a managed portfolio, a particularly popular way for people to get started in investing and learn the ropes. There are a wide range of managed portfolios that can provide a well-diversified range of shares to investors. This helps to limit the risk faced by investors if a company should collapse, taking all of its investors’ cash with it.
Another plus for managed funds is that you can buy into a fund with as little as $500, which is great for smaller investors. Usually, if you are starting that small, the funds require an ongoing investment commitment. The idea is that you will keep contributing to the fund over time, building your stake. This can be a great way to start a savings plan AND put your money to work straight away.
Many investment funds, however, allow would-be dabblers to place $1000 into the pool without having to place additional funds in.
Australian shares and international shares
Over the last four years, Australian shares have yielded an average of 20 percent returns and an average of 14.2 percent over the last seven years. For short-term investments, a portfolio of 60 to 70 percent of Australian shares maybe worth looking into. Ask your financial planner for advice that is appropriate to your circumstances and be aware that past performance may not be indicative of future results.
Similarly, for longer-term investments, a more even mix of international and Australian shares could be beneficial. The Australian Stock Exchange’s largest sectors are in natural resources and the financial markets. International exchanges, on the other hand, offer a much wider variety of stocks in technology and even the new, but strongly emerging, carbon trading industry.
DIY versus a stock broker
All around the world, many people buy and sell shares from their own homes. All you need is an Internet connection and the right software. (A word of caution: beware of scams – visit the Government ASIC website for advice before you buy any financial services products, especially trading software).
Learning the ropes: share price analysis
However, getting the tools together is not really the difficult part. It also takes discipline. Learning to analyse the market and pick the shares to buy and sell is the trick and can be complex. As the demand for this knowledge grows, there are an increasing number of ways to get this kind of information though. Industry insiders rely on a range of sources. The Rivkin Report is a well known source and is used widely by people wishing to access information about ASX-listed companies . It includes valuable insights from stockbrokers and has a good track record of returns. Other well regarded sources include Huntley’s newsletters and Fat Prophets reports.
For those wanting to delve a little deeper, there are many short courses available. Of course, subscribing to various bulletins, magazines and newsletters, reading the papers, and taking the time to review the annual reports of the various companies you are studying are all classic ways to get a feel for the industries and companies you are investing in.
Finding a stock broker
Gathering and understanding this information can be very time-consuming. If you think trading shares from home is an easy way to make some extra cash you’re mistaken. It’s a business – and if you start it as a part-time business, potentially an all-consuming one. For occasional trades then DIY broking or online trading, might be the way to go for you. You can take a look at CommSec, NAB online trading or Macquarie Bank. If you are going to get more heavily involved then perhaps you’d be better off employing a broker whose job it is to keep on top of information as it comes to hand.
Reputable and long established broking firms include: Goldman Sachs JB Were (two big name firms now working in partnership); Bell Potter Securities; Bridges Financial Services; Ord Minnett Ltd; Citi Smith Barney and Baillieu Stockbroking. There are, of course, many other stock broking firms. You can find various lists of stock brokers and financial advisors on the ASX website.
