If you’re asking yourself how to begin investing in shares, you’re at the beginning of a fascinating and information-filled journey. And we’re here to help! So, let’s find out more about shares and how to get your foot in the door.
What are shares?
Shares are units of a corporation that can be bought, sold and owned. In other words, they are a percentage of ownership of a business. So if you purchase shares, then you essentially become a shareholder in that corporation.
What types of shares are available?
The answer to this question can get very complicated very quickly. As such, given you’re just asking yourself how to begin investing in shares, let’s take a simplified approach for now. Essentially you have two types of shares:
1. Shares you purchase directly
This is pretty self-explanatory and refers to shares that you would buy yourself. To do this, you would typically set up a brokerage account, perhaps with one of the larger financial institutions like ANZ Share Investing or CommSec.
2. Shares you purchase through a managed fund
A managed fund refers to investing in a fund that holds shares; it is run by a fund manager, meaning you pay extra for that service. However, in this instance, you defer expertise to the manager rather than trying to ride the waves on your own. Perhaps think of a managed fund a bit like a superannuation fund - you’re investing in a portion of a pooled group of assets. Managed funds come with their unique mandates, policies and vision and some of these include:
Funds investing only in shares on the Australian Stock Exchange (ASX);
Exchange-Traded Funds (ETF) that track the Index, meaning your funds rise or drop in value in direct correlation with the ASX;
Funds investing only in foreign shares.
How do beginners buy shares?
Whether you’re a beginner or not, the way you buy shares is the same - either directly or through a fund. However, as a beginner, you are probably more likely to purchase through a managed fund. Why? Because for the most part, beginner share investors are unlikely to test the water with vast amounts of funding, and you need to make your money work for you.
Let’s say, for example, you have $5,000 at your disposal, and want to know how to begin investing in shares. The golden investment rule - be it shares, managed funds, property, cryptocurrency or superannuation - is diversification. The last thing you want to do is put your 5,000 eggs into one basket. Now, $5,000 is a lot of money, granted. However, if you're going to diversify and buy shares directly, those $5,000 won’t go very far at all. For every batch of shares you buy in a company, you must pay a brokerage fee. By the time you’ve paid the various brokerage fees to give you a good range of investments, a good slice of that $5,000 has gone into someone else’s pocket.
In contrast, a managed fund means you’re only paying a fee for one transaction. However, in comparison to direct share purchase, that single transaction offers you skin in the game across several companies. So, in this instance, your $5,000 exposes you to perhaps upwards of 200 stocks, meaning you have maximised your diversification whilst minimising your overheads.
How much should you invest in shares for the first time?
How to begin investing in shares is a question very quickly followed by how much to invest. Irrespective of your situation, we believe that the answer lies in dollar-cost average, or DCA.
What is dollar-cost averaging?
Although many try and try again, predicting sharemarket trends or timing the market is near impossible. As such, the best approach is long-term, taking into consideration market fluctuations. Dollar-cost averaging is a share investment strategy whereby you make periodic investments rather than emptying all eggs at the same time.
Let’s use that $5,000 again. If you were to invest the whole amount right now, you would purchase at the current market price. That might - or might not - work in your favour. However, if you divvy up the $5,000 and make several purchases over a period of time, you will be charged an average purchase price, which typically puts you in a better position.
For example, let’s say that in January you want to purchase shares in Company A, when the dollar cost is 100. Assume you purchase the same amount of shares again in March, but this time the purchase price is 80. Your average across the two purchases is now 90, so you’ve neither paid top price nor bottom, but that Goldilocks ‘just right’.
Mistakes that beginner share investors make
If you want to know how to begin investing in shares, the answer lies in objectivity and consistency. It is easy to get caught up in or react to the hype as a novice. Don’t. A smart share portfolio is a cool one. It’s all about remaining level-headed, impartial and confident in the long-term (assuming, of course, that as a beginner you are not a high-risk investor. But wherever you lie on the risk profile, we’re here to help!). It’s not just beginners - even savvy shareholders can get caught up in the frenzy or panic and buy when the market is high and sell when it’s low. When it comes to shares, you almost need to be counter-intuitive; get in when things are going badly. The aim is to then stay in for as long as you can to accumulate wealth. When it comes to retiring or making a sizeable gain, exit the market when it is going well.
Contact ActOn Wealth about starting your share portfolio today
If you want to know how to begin investing, we’re here to help. Nothing brings a smile to our dial faster than a healthy discussion about the share market! As a beginner, we know that you might have many questions and perhaps even some reservations. Our experienced team is here to guide you through it all. We want to help you cut through the sometimes intimidating amount of information so you can own this and see it for the exciting wealth-growing opportunity that it is. We’re here to help, so contact us today!