Someone’s sitting in the shade today because someone planted a tree a long time ago.Warren Buffet
Navigating the market might be a daunting task. There are hundreds of stocks listed, many prices moving, red tickers, green tickers, candlesticks; the overwhelming amount of information may be convoluted and it seems very difficult to start. Whilst investing is no easy feat, and making respectable returns is not always guaranteed, we can make the process straightforward for an enterprising investor.
What is a share and how do I buy one?
To put it simply, a share is simply a single unit of ownership in a company. When you buy a share on the stock market, you buy a part of that company.
Some of Australia’s largest companies such as the Commonwealth Bank, Fortescue, Sydney Airport Holdings are all listed on the Australian Securities Exchange (ASX) also commonly called the stock market or stock exchange. There are over 2,000 companies listed on the ASX giving investors the breadth to invest into different industries or company sizes; giving investors ample opportunity to tailor portfolios to their risk preferences and investment objectives.
Other global stock exchanges include the New York Stock Exchange, NASDAQ, Hong Kong Stock Exchange and Tokyo Stock Exchange containing shares of companies from each of their respective companies.
Where do I find information about shares?
You would be mistaken to think that a simple Google search is the best way to find information about stocks, unfortunately, you will find bits of information missing. Instead, databases will contain greater detail of information including news updates, analysis and historic ratios. Some free databases include Yahoo Finance or MarketIndex however the reliability of the information on these sites differ. Maqro itself has a platform with aggregated data and expert advice that gives investors a competitive advantage when assessing which stock to buy.
For investors who want to understand the companies themselves, – their products, markets, future expansion plans – reading company reports such as annual or quarterly reports are useful. It is important to take information online with a grain of salt and apply a degree of discretion when assessing the validity of the content- unfortunately not all content is created equal.
How do I buy shares?
So now that you’ve found a stock you like, you need to know how to purchase it. To execute the transactions of buying and selling shares, a third party, or a broker, must be used. It should be noted that a fee or commission applies when using a broker.
Fees on brokerage platforms vary as investors may opt for self-directed trading- where they execute trades on their knowledge. Alternatively, investors may consult expert advice for small fees to aid them in achieving their investment objectives.
How do you learn to invest?
With the internet at our fingerprints, the proliferation of information has meant that sifting through vast oceans of advice and content may be draining and confusing. Instead of setting out to learn about companies or investing, the investor must reflect on themselves first and determine two key variables.
Your Risk Tolerance
Before we go off seeking astronomical returns, the investor must know their risk appetite. It should be noted that in general circumstances, a higher degree of returns entails a higher degree of risk.
It is important to know your risk tolerance so you do not blindly invest in perceivably high returns; then faces disappointment when market volatility decimates returns. Instead, understanding one’s risk tolerance allows the investor to be diligent and level-headed when unexpected events do occur.
Shares are considered a riskier type of investment (which necessarily yields higher returns) so it is important that we are comfortable and do not overreact to losses in the market.
You investing Objective
Moreover, it is important to set some investing objectives. If you are looking for a place to start, consider an important purchase you would like and view investing as a means to achieve that purchase. In other circumstances, some investors seek to outperform a market benchmark. In this case, we would assess the performance of our portfolio to the performance of, for example, the ASX200 and evaluate whether underperformed or outperformed the market.
Setting objectives is imperative because it allows investors to set realistic expectations not only regarding performance but also macro-economic factors- investors need to consider inflation, unemployment and GDP growth. Above all, investors must have REALISTIC expectations with their returns.
Secondly, setting objectives allows the investor to factor in the time horizon of their investments. Some investments may be better for the short term e.g. they are expecting a healthy dividend payout, compared to long term holdings where perhaps solid fundamentals cause prices to rise. Critically, knowing your investing objectives help tailor an adequate investment strategy.
Where do I learn to invest
Once we have identified our investment objectives and risk tolerances, we can build our confidence by acquiring knowledge. The Australian Government’s MoneySmart Website advises people to be educated about interest rates, exchange rates and government policy; to then understand how these factors may affect company performance. You can quickly see why having advisers on your side is beneficial as this learning curve can be steep at times.
For a budding investor, the ASX website has an investing education section that may help you understand the basic technical aspects of investing.
For a more insightful source, reading is a phenomenal method to increase one’s knowledge. Some of the world’s most famous investors have books, letters and other pieces of literature that are worth reading to understand how they assess companies and to understand how to apply technical analysis to our own investing.
With the internet, it is important to distinguish between reliable sources and articles of lower quality. Stick with trusted websites and take some information from the internet with a grain of salt; it is important to separate fact and opinion especially as the lines blur online.
For those wanting to go the extra mile, consulting advisors would be the next step in tailoring your portfolio for your risk preference and objectives. An informative advisor can assist you in navigating the tailwinds of the market and build your confidence and knowledge in investing.
What do I look for in a company?
It is important to remember that past performance is not indicative of future performance. Nevertheless, it is important to assess a company’s track record to identify areas of consistency and whether they are positioned for future success.
Some good questions to ask are:
- How does this company differentiate itself from its competitors?
- What is happening in the economy that could impact my company in the future?
- Does my company offer a product with few substitutes and adequate demand?
- What is the company’s future growth plans?
- Is the industry that my company operates in, poised to grow?
How Can I Make Money from Shares?
When you sell your stock at a higher price than what you purchased it for, that is referred to as a capital gain. On the other hand, you would experience capital losses if share prices fall below the price you paid for them.
Companies may distribute a portion of their profits to shareholders as a “dividend”. Typically this is paid twice a year, however not all companies pay dividends as they may choose to use that excess cash for different purposes.
How much do I need to start?
Truthfully, the answer is that it depends. The ASX suggests that you should start investing with “at least $2000” though this view is not unanimous.
With brokers charging a fee, the less you invest, the more fees will be as a portion of your investment; and thus your required returns will need to be higher to offset this cost. Thus most brokers would suggest that $500 be the minimum amount necessary to begin investing.
Called the “only free lunch in investing” diversification is a straightforward method to reduce risk in a portfolio. Without getting too technical, it is advisable for the investor to not put ALL their money in one stock or industry as a downturn may disproportionately affect that company/industry. Instead, the investor should distribute their money across stocks in different industries
An advantage of dividend-paying stocks is the ability to reinvest our dividends into the company by purchasing more stock. This essentially means that we do not need to pull out of our pocket to increase the size of our portfolio. Some brokers have automatic reinvesting options and it is nevertheless an attractive feature of dividend stocks.
Types of Orders
So now that we understand the basics of investing, we have identified our objectives, consulted an advisor, we are finally confident in making our first transaction. Before we receive our shares, there is one last aspect to know about the market- there are two different ways to buy shares.
Market orders are designed to execute transactions quickly at the current market price. The investor has less control over the price of the transaction and is instead, rewarded by not needing to wait.
With limit orders, investors can set the maximum price at which they want to purchase the stock. When selling, limit orders allow investors to set the lowest price at which they are willing to sell. Limit orders give investors more control over their purchases but transactions may not occur instantaneously.
With these steps completed, you should feel confident in beginning to invest. Laying the foundation in understanding companies, industries, the economy and yourself are critical steps in understanding how to invest. Lifelong learning is a cornerstone of investing so those who continue to pursue knowledge position themselves to understand their investments better.
Use this guide as your roadmap to help you navigate the market!