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How to Start Investing in Shares?

How to Start Investing in Shares?

Aditya K

How to Start Investing in Shares?

A few decades ago, investing in the stock market was only for the wealthy and people who worked in the industry; it was not easily accessible to the public. Unless you were in that tiny subset of minority, there was plenty of unknowns about it. Much has changed since then, with an average person having the capabilities to purchase shares through a swipe of their fingers on their phone. However, the sheer amount of information out there, as well as the difficulty of navigating through the information noise, can lead to a high barrier to entry in the stock market. The chaos of conflicting news, marketing ploys and differing opinions can be relatively daunting to someone who wants to start. Hopefully, this guide to start investing can provide a prudent and clear path for individuals who wish to step foot into this field.

Mindset

Firstly, investors need to define a few things before aimlessly buying a stock.

Risk: What is your risk tolerance level based on life stage and preference?

Risk is usually taken proportional to the expected returns, with investors seeking a greater return for a higher risk investment. How much risk a person is willing to take will greatly determine their investing approach and investment horizon. For example, a young person with a long-term view of investing can afford to take on more risk and hence will include riskier assets in their portfolio. The general investment mix based on risk falls into 3 categories: Aggressive/growth, balanced and defensive/stable.

Control: How much control do you want in managing your investments?

Some investors prefer to have absolute control in how they manage their stocks, hence they will transact on their trading account without supervision. Certain people want minimal control due to their busy lifestyle or lack of trust in their investment skills, which leads them to leave their money with a fund manager to invest in the sharemarket. There are also people in between this spectrum and they will either resort to a human or robo-advisor for financial advice on how to manage their investments.

Setting it all up

The practical steps come next, with the first thing to set up a trading account. The key things that investors need to consider are listed below.

  • Brokerage/ commission fees: Apply to each buy and sell transaction based on transaction size. The rate can be flat or percentage-based.
  • Other fees: inactivity fee and foreign exchange fee (to transact foreign stock)
  • Accessibility on the various stock exchange
  • Tax on income: Income Tax varies across markets. For Australia, it is 30% after excluding all fees.

Once this is done, investors need to know what shares they want to buy and what methodology or thought process is performed to come to that conclusion. There are various methods and a multitude of strategies out there, with the main categories being fundamental analysis, which is the study on a company's financial strength; technical analysis, which is the forecast of share price based on historical price movements as well as other indicators; and quantitative analysis, which is the use of mathematical and statistical analysis in finance.

Lastly, investors are required to consider the parameters around trading a stock. These include the timing of entry, share price of entry, target price, allocation/sizing and stop-loss if applicable. 

Managing investments

After purchasing multiple stocks, what investors are left with is a portfolio. The key points to look out for include sector exposure (is the portfolio leaning heavily towards a specific sector?), geographical exposure (is the portfolio leaning heavily towards a specific country/region?) and risk/reward profile (has the portfolio been performing well relative to the risk taken?). Investors will also need to monitor their individual positions and assess if anything has changed their investment decision.

The journey to invest in the stock market is exciting and immensely interesting, but could also be dangerous if an investor neglects the basic steps needed.

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