Buying shares: A step-by-step guide for beginners
There’s been a surge in new stock market investors this year, looking to grow their wealth through shares. Experts reveal their tips for entering the market for the first time.
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COVID-19’s sharemarket crash in March sparked a new breed of investors seeking to bag a bargain and begin a new hobby while in lockdown.
Newcomers have enjoyed nice gains from the market’s rebound since its 37 per cent fall, and as we approach October – a historically volatile month for stocks – novice investors may be busy again.
But investment specialists warn diving into shares without a plan can be dangerous to your wealth.
Investment platform eToro’s Australian managing director, Robert Francis, says shares can be daunting but this year’s falls create chances to buy more with less.
Here’s a step-by-step guide.
1. UNDERSTAND WHAT THE MARKET IS
“The sharemarket or stock market is where people can buy and sell shares in publicly-listed companies,” Francis says.
A share is simply a slice of that company – whether it’s Woolworths, Westpac, Apple or Amazon – and each investor receives their share of its income, growth or falls.
2. LEARN ABOUT COMPANIES
There’s a huge amount of information available in the financial media in print and online, and Francis suggests reading business news daily to understand how stocks are performing.
“When picking stocks consider investing in your passions and interests, as you are more likely to understand how they best operate,” Francis says.
3. CHOOSE HOW TO INVEST
Traditional stockbrokers offer valuable advice and are generally best suited to customers with tens of thousands of dollars.
Lower-cost ways to buy shares include online stockbrokers such as CommSec, Bell Direct and nabtrade, which focus mainly on the ASX, while investment platforms such as etoro.com and stake.com.au can broaden options internationally.
The minimum investment on a platform may be less than $100, while ASX trades require a minimum of $500 – plus trading fee of $10-$20. Before choosing, research all fees and features.
4. THINK LONG TERM
“The stockmarket should not be thought of as a get-rich-quick scheme,” Francis says.
Bell Direct head of distribution Tim Sparks says people should think about their investment objectives and time frame.
Sharemarket volatility makes it unsuitable for saving for a car or holiday, but longer term has delivered much higher returns than bank deposits.
“On average, the stock market tends to have one negative year in every five years,” Sparks says.
5. DIVERSIFY
Make sure your investments are not heavily weighted towards one company or sector.
“Many investors start with choosing an exchange traded fund – you get diversified exposure to a basket of shares which track an index, such as the S&P/ASX 200 which represents the largest 200 stocks on the ASX,” Sparks says.
6. REVISIT AND RE-INVEST
Shares should never be set and forget. Check your progress and make tweaks if necessary.
“An effective way to create wealth is to automatically reinvest your dividends instead of receiving the cash payment,” Sparks says.
Dividend reinvestment plans can be easily set up and supercharge the power of compound interest, he says.
Aidan J.M. Laird, 22, started investing in January and used March’s COVID crash as an opportunity to make more money.
“When the markets fell, I decided to increase my stake in multiple investments and sure enough it all paid off once the market shot back up again,” he says.
“Always remember the wise words of Warren Buffett: ‘be fearful when others are greedy, be greedy when others are fearful’.”
Laird owns about 10 companies including Tesla, Apple and Facebook, and says patience is the best trait an investor can have.
“Always know your limits and when to stop. Use a proven strategy and never start investing based on your emotions or what your friends say.”
SECTORS TO WATCH
RETAIL: Some stores have boomed amid COVID-19’s surging demand – such as Harvey Norman and JB Hi-Fi – while Myer and many speciality chains struggled. Choose carefully.
FINTECH: Payment platforms such as Afterpay and Zip Co surged this year but fell sharply this month, and analysts predict more volatility.
HEALTH: Many biotechnology and health companies have a bright future, but some analysts see them as expensive right now.
PROPERTY: Stocks that own office towers and shopping centres are hurting, while those focused on logistics and warehousing are in demand. Do your homework.
GLOBAL GIANTS: Apple, Amazon, Google, Netflix and Facebook have propelled the US sharemarket higher, and there are mixed views as to whether they’ve run too far or will continue climbing.