I am a great fan of The Motley Fool, which is a service I subscribe to for advice on investing in the sharemarket. It is easy to read, full of common sense and is a great reference point for new and experienced investors.
Below are some great tips they have about investing in the Australian sharemarket, which I have reproduced from an article by Owen Raszkiewicz. I place a particular emphasis on the “THINGS TO AVOID SECTION” because it is extremely rare that we see clients profit by trying these strategies!
How do I buy Australian shares?
You’ve heard your friends brag about all the money they’ve made, the enormous dividends they’re receiving, and this thing called the sharemarket.
It’s a relatively easy process to get started in shares, but making sure you pick the right pathway isn’t always straightforward.
Firstly, let’s ask ourselves, what are shares?
No matter what shares (also known as ‘equities’ or ‘stocks’ – they’re the same things) you decide to buy, just remember – shares are simply part-ownership of a company. Nothing more, nothing less. So even if you buy only one share of Telstra Corporation Ltd (ASX: TLS), you’re a part-owner.
Naturally, the ‘share market’ is simply a digital place where people can come together to trade their shares. In Australia, the primary market is the ASX. You access the market via a stockbroker.
What is a stockbroker?
Stockbrokers primarily come in two forms: full-service stockbrokers, and discount brokers.
A full-service stockbroker is someone who you meet with in person to discuss your ‘risk profile’ and objectives. They are usually higher cost than the alternative and receive a commission per trade.
Discount brokers are generally cheaper and more convenient. Since shares can be bought and sold online using your mobile, tablet or PC, you can think of them as the child of web-banking and eBay. You can browse for particular shares you’d like to buy – then the integrated bank account funds the purchase.
Which broker is right for me?
When I started investing, money was tight. I couldn’t buy $100,000 of shares at a time. In fact, I started with only a couple of thousand dollars. My share purchases were around $500 (some still are). Therefore, picking a brokerage account with minimum trading costs was paramount. Remember, it costs, for example, $10 to buy and $10 to sell.
Things to consider, include:
- Commissions: Most brokerages charge a minimum, say, $10 to buy or sell $1,000 worth of shares. Then, anything above the minimum attracts a fee of, for example, 1% of the total trade.
- Extra costs: Many brokerage accounts charge you a subscription fee for information. For example, if you want share prices to update without a 20-minute delay, many brokerages will ask you pay an additional $10-$50 per month. Consider if you need this. Remember, 99% of the time you’re paying for this you are not trading shares. There are other costs you need to consider, but commissions, data feeds, and information are the main ones.
- Ease of use: I had to open a new bank account as well a brokerage account to use the broker I wanted. However, some of the major banks have their own brokerage arms which make opening and funding your brokerage account easy. However, the financial world is full of ridiculous get-rich-quick gimmicks, conflicted interests, and commissions designed to make you trade more often. So consider if having immediate access to savings or everyday cash accounts really is appropriate for you. I choose to keep my accounts separate. The couple extra days transfer time has saved me from making many poor decisions.
How to fund your account
It takes a few days to fill out the account paperwork, send off your ID documents for approval and be ready for funding. Most brokerages will ask that you have a minimum of, say, $500 transferred to your account within X-amount of days to confirm its opening. So make sure you have some cash set aside to do this.
The process is usually pretty straightforward. Each broker has its own rules and processes, but usually you just transfer with direct deposit or BPAY into the account. It may, depending which broker you go with, take a few days.
Things to avoid
Many people approach the share market thinking it’s a place to get-rich-quick or make an easy buck. And your brokerage (remember how they get paid) loves it when you make heaps of trades every day, week or month. They may even give you rewards.
However, they’ll go one step further and offer you exotic products which, at least in my experience, have proven to be disastrous for most people.
Here are things you should avoid altogether, or keep to an absolute minimum:
- CFDs: These are trading instruments frequently advertised on TV. They are extremely risky and I’ve never known anyone to use them well. Period.
- Options and warrants: These are higher-risk investments and things you don’t need when you’re just starting out.
- Speculation: My basic rule of thumb is this: If you can’t explain why you’ve bought a company’s shares and explain the risks involved – you’re speculating, not investing.
- Short-term trading: This is similar to speculating. Remember, shares are ‘riskier’ than other assets, however, over very long periods of time the share market has outperformed every other type of investment – even property.
Things to consider
Can you be bothered going through all this process and researching shares? It takes a long time to get right, can be extremely costly and most people will never be successful investors.
So if you don’t want to invest directly in shares for yourself, that’s completely okay because there are many passive investments availableon the market. I invest part of my family’s wealth in passive investments.
Getting started in shares is the easy part. It’s how you buy and sell your investments that will determine whether or not it was a success or failure. Remember to keep it simple, buy shares in companies you know and hold for the long term. Don’t be disheartened by short-term losses and expect 50% falls in your portfolio’s value every 7-9 years.