For some of us, when we hear the words ‘investments’ and ‘shares’, we likely envision people in business suits, eyes glued to the stock markets, handling absurd amounts of money. For others, scenes from The Wolf of Wall Street may come to mind. All common images that for many, fuel the idea of elitism and the need to have buckets of cash to get a foot in the door.
However, right there in your pocket lies access to the technology to start investing. In this day and age, it’s no longer just successful entrepreneurs who can pull together multiple streams of income and investments. Millennials and Gen Z-ers are becoming more ‘invested’ (pun intended) in learning about how to invest in shares.
So, while we all can’t be Jordan Belfort – not that this should be a goal (if you know, you know) – we’re going to explore how, with the right research and knowledge, anyone can start investing from the comfort of their own home. Our ultimate beginner’s guide to investing will offer insight into how to invest in shares.
What is a share?
Before we dive into what investing is, let’s begin with the basics – what are shares? In the simplest terms, a share is a unit of ownership in a company, mutual fund, financial asset, or trust. Essentially, shares can be understood as stocks, securities, or equities. When you buy shares in a company – even a very small number – you then become a shareholder and are entitled to a small part of the profit that the company makes. These are paid out as dividends and can be a way of shares generating returns for the shareholders. You can own shares yourself, or pool money with other shareholders in what’s called a managed fund, also known as a collective investment.
Using a broker to invest in shares
To conduct the actual transaction of buying or selling shares, you need to use a third party – a ‘broker’. You can choose to use an online broking service or a full-service broker.
Online broking service
With an online broking service, you open an online trading account and make your own investment decisions. Since you are doing it solo, the fees are lower.
When you use a full-service broker, the broker does the trading for you. Generally, your contact with your assigned broker involves a call or an email, to which they carry out trades based on your instructions. Full-service brokers advise you on what to buy or sell and they must provide a reasonable basis to recommend something to you, and disclose any interest they have in it. They normally charge a premium fee for their service which can range from $50-$200 per trade.
Types of shares
There are two main types of shares – ordinary and preference. Both represent a shareholder owning a part of a company, but function in slightly different ways. It’s important to understand these distinctions and how they can affect the way you decide to invest.
Ordinary shares are the basic voting shares of a company. Holders of ordinary shares are typically entitled to one vote per share and only receive dividends at the discretion of the company’s management. The dividends fluctuate depending on the company’s performance. So if the company liquidates, the shareholder may not receive a payout.
Holders of preference shares are usually given priority or preference over ordinary shareholders to payments of dividends. One of the biggest advantages is that preference shares usually come with a set payment criteria which guarantee holders to regularly receive paid dividends. Preference shareholders are also prioritised ahead of ordinary shareholders – they must be paid before any ordinary shareholders can receive dividends.
What is investing?
Now we know we know the basics, let’s talk about how to invest in shares. Investing is the act of setting aside and allocating money to generate a profit or a return on investment (ROI).
How can I make money from investing in shares?
People aim to make money from investing in shares through one, or both, of the following ways:
A share in the company’s profits: As we mentioned before, ‘dividends’ are payments that are a portion of a company’s profits paid out to shareholders. While all companies don’t have to pay dividends, many see it as a way of returning earnings to their shareholders.
An increase in share price: Usually known as ‘capital growth’ or ‘capital gain’, this simply means you make money by buying your shares for one price and selling them for a higher price. It’s important to remember, if share prices fall below the amount you paid and you sell your shares at this lower price, you would be losing money.
How are shares bought and sold?
Shares are bought and traded on a stock exchange. Majority of shares today are traded electronically, meaning orders are placed and matched online by exchange-operated software. Investors use buy and sell orders to move shares. A buy order means an expression of interest in buying a certain amount of shares in a certain company. A sell order signals that the person who placed the order wants to sell their number of shares right away.
Once an order is filled, the involved parties are typically given a few days to conduct the transaction and move their shares around.
Steps to investing in shares
Step 1: Find a stockbroker
First thing’s first, to invest in shares you’ll need to find a reliable stockbroker before you can buy and sell shares. You’ve got two options – you can buy shares using an online broking service or use a full-service broker.
Step 2: Register for an account
To be eligible to sign up to a broker in Australia, you’ll need to:
- Be an Australian Citizen or Permanent Resident
- Be 18 years or older
You’ll also need to provide the following documentation:
- Your name, address, D.O.B and contact details
- Your tax file number (TFN)
- Proof of ID
- Your bank account details
Step 3: Make a plan
We know you’re eager to get into those stocks, but it’s important to have a detailed plan before you commit to buying shares. We can’t deny the fact that investing in shares can sometimes be a risky business. So it’s important to reflect on why you want to invest and map out a timeline. This can help you work out your strategy and avoid making any irrational decisions down the line.
A few questions to ask yourself when creating your plan:
- How much money can I afford to invest?
- What does each option cost?
- How much control do I want to have over my investments?
- Am I going to make regular investments?
- What will I do if prices start to fall or rise?
Step 4: Choose your shares
Now to the most exciting part, choosing your stocks. This is also the most challenging part of the process. With tens of thousands of stocks available to choose from,you need to put your metaphorical FBI cap on and research which ones best match your investment goals. Here are some things to consider to help you decide:
- How trustworthy is the company?
- Do you frequently use the company’s products? E.g. Apple or Facebook
- What are the company’s debt levels?
- What is the company’s profit growth?
- Does the company pay dividends?
Step 5: Buy your shares!
You have the account, the money and the stock you want to buy. All you need to do now is order them. If you have a full-service broker, you’ll need to call or email them to place your trade. If you’re using an online broker, the ball’s in your court. Depending on which trading platform you’re using, there are multiple ways you can order your stocks – some will have simple instructions and others may be more lengthy and complex. You can choose from the following to place an order:
A market order is the most basic option you can select. It lets you buy or sell shares immediately at the current market price. This is likely the best option if you want your order to be fulfilled immediately.
A limit and stop order lets you specify the exact price you want to buy or sell shares. The biggest difference between the two is that a limit order is visible to the market, and a stop order is not.
If ANZ’s share price is at $68 but you want to wait until it falls to $65, you can set a limit order to execute once the price falls to $65 or lower.
Step 6: Monitor the performance of your shares
Congratulations! You’re done – you’ve officially bought shares. If you have bought Australian shares, you should receive an email or letter of confirmation of your status as a shareholder, along with your holder identification number (HIN). Keeping your investment plan in mind, the next step is to regularly monitor the performance of your shares.
If you bought shares with a long-term investment plan in mind, you may only need to check the price movements every few months. On the other hand, if you have a short-term plan, it may be a good idea to check more frequently.
What are the costs?
As economists say, ‘there’s no such thing as a free lunch’. This applies to investing in shares. Different types of investments have different costs. Most typically incur some sort of transaction fee, commission or other expenses. When you buy or sell shares, you will have to pay a brokerage fee, in addition to the amount of money you spend on the shares themselves. For example, if you buy shares in four different companies, you will have to pay four different brokerage fees.
Essentially, the less you invest, the higher the costs will be as a percentage of your total investment.
- If brokerage costs you $19.95 and you purchase $600 of shares, brokerage will represent just over 3.3% of your investment.
- If brokerage costs you $19.95 and you buy $5,000 of shares, the brokerage will represent only 0.4% of your investment.
Realistically, it all comes down to how much and how often you trade, bearing in mind that fees can add up and affect your profitability.
It's best to make investment decisions once you have a clear view of your financial goals.
For a while, investing has been reserved in many people’s minds as something for older people with existing wealth – a common misconception that is continually being debunked. Anyone can invest in shares! It’s never too late to start investing and no amount of money is too small to start. People of all ages and financial backgrounds need to develop a well thought out investment plan.
Whether you want to work solo or with an investment professional, you should develop a plan that is tailored to your own unique needs.
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Enjoyed this guide on how to invest in shares? At Oiyo, we’re trying to change the way we talk about money. We’re not financial advisors, but we can offer helpful insights and information on finance to help you navigate the world of finance. We write helpful guides covering everything from personal finance to loans to insurance. We aim to make it easy for Australians to have access to simple, to-the-point financial guides. So, whatever financial query you have, Oiyo is here to help.
Oiyo is a consolidated online resource, we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.