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Want to get started in shares? Not sure where to begin? If it's time you got a grip on the basics, set some goals and developed a strategy read on! (The introductory guide below is tailored towards those with a view to long-term investing, being a term of three to five years or more.)
Learning the basics
Before leaping head first into the world of stock market investing, do some homework on the basic mechanics of how the share market operates and familiarise yourself with some of the fundamental principles of investing.The ownership of a share represents partial ownership of a business. The fact that the shares are traded on a stock exchange means it is a easy for investors to buy or sell their shares in these businesses. Not only will you need to udnerstand how share trading works, you may want to read up on certain companies to find out if you want to put money into their businesses. How you spend your money will influence the wider world. There may be certain types of industries you favour over others, or certain countries you'd rather circulate funds too. Regularly reading the newspapers (Australian and international papers) will improve your general knowledge and put you in a better position to discuss your needs with your broker or financial planner. There are many useful resources available on the web to help you get started and improve your understanding of the basics of investing in the market. Two excellent resources are www.asx.com.au and www.comsec.com.au. Taking some time to learn the basics - and taking an active interest in where your money is going - will literally pay you dividends in the long run.
Setting a goal
As with any endeavour, setting a series of goals will help you stay focussed on your investment strategy and prevent you from being distracted by all the “noise” in the market place – and there certainly is a lot of noise out there. Trading can become quite addictive so it's important to remain clear on your goals and objectives. This will help prevent you from being unduly influenced and lured into more active trading strategies that may significantly increase your transaction costs but won't necessarily earn better returns. When you set goals make them realistic and include things such as performance return targets. One goal might be to earn a return of 15 percent on investment over one year.
Creating a strategy
There are many investing strategies out there ranging from active day trading to longer term buy-and-hold strategies to more complicated arbitrage and long/short strategies. Sit down with a professional advisor to indentify what your risk profile is, how you are going to fund your purchases and whether you are going to use leverage, and what your investing goals are mid to long term. Once this has been done there are some basic steps to take to get started. For the long-term investor, the basic steps are:
- Asset allocation – decide what portion of your investable funds you are willing to put in shares.
- Sector allocation – give a break down of what sectors of the stock market you want exposure to. As a rule of thumb, diversification across a range of industry sectors will reduce the overall risk of the portfolio.
- Decide which companies in each sector to invest in – for the beginner, it is generally a safer strategy to go with well established “blue-chip” companies across the various industries. These tend to be companies with a strong history and track record of paying dividends, as well as having growing earnings.
- Once you’ve decided on a strategy, stick to it.
Start investing
Trading shares is done through a broker. There are two main types of brokers: the full service broker and the discount broker. Irrespective of which one you use, the ultimate decision to by or sell a share is up to you, however full service brokers offer professional advice in addition to trade execution. Discount broking has become very popular among traders in Australia and worldwide. Most provide all the information you need to make an investment decision (such as company reports, financial information, management information, etc). It can even be done online. Popular online brokers in Australia include CommSec and Etrade.
