Yahoo Finance 3 simple steps to get started in the stock market today
If you’re sitting on a bit of money, rather than play off different streaming services against each other, you should mull the merits of parking your cash in accounts versus actual companies.
Thanks to COVID-19, one is returning far more than the other.
The thing is that with the official cash rate at a panic-this-is-a-pandemic level, the interest you can earn in bank accounts and term deposits is barely worth the effort of visiting a bank website.
Meanwhile, the index of Australia’s leading shares has just hit yet another record high, pushing above 7,500 for the first time.
Not that the time to invest is when a market is high, but if you can leave money in the market for at least five years to wait out any potential price dips, it’s all food for thought.
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And this is particularly so when you consider that the income you’ll earn from money you deposit in the bank is now perhaps not even half the amount you’d make if you instead collect dividends from bank shares.
So here are the three steps to getting started in the stock market.
Step one: Set up a trading account
First up, to buy and sell shares – which are quite simply ownership ‘chunks’ of a publicly traded company – you’ll need a broker.
The good news is that you no longer have to pay a fortune for a full-service broker, but can do it through what’s called an execution-only, online one. This will cut your costs to perhaps as little as $8 a trade.
It’s super simple to sign up online, too. You’ll need proof of address and photo ID, and you’ll be up and running within days.
Most brokers will display the shares you end up buying in a ‘portfolio’, and maybe require you to hold a linked transactional account to pay and receive money for and from them as well.
Step two: Decide what to buy
Now, this is probably the more daunting part especially the first few times.
However, each of us is equipped with an inbuilt radar for what’s an intuitively good investment.
For example, PPE equipment, furniture retailers and booze shops, during a worldwide health crisis.
Often, spotting investing trends just requires using a bit of latent logic.
And beyond identifying red-hot industries for the current investment environment, it can be easy to pick out a good business model, too. They’ll be the ones with the queues out the doors or at the moment, the most people clicking from the couch.
Having said that, it’s very easy to get wrong a call on an individual company. Anything can happen operationally to that company, that you could have no idea about.
What’s more, you want to invest in at least 10 companies to protect against one bombing out, in an important safety technique called diversification.
Unfortunately, as a private investor, you may not have enough money at the outset to successfully spread that far.
I’d recommend a minimum total purchase cost of $1,000 per share. So you’d need $10,000 straight up to more safely start a portfolio.
Here, however, there is help. There are several different products that trade exactly like shares – so you buy and sell them through a broker as normal – but that contain within them lots of other shares.
Things called exchange traded funds (ETFs) allow you to diversity not just by company, but by industry and even by country. You often simply ‘buy’ an index and get an investment return virtually identical to that index.
Then, there are listed investment companies where the underlying share selection might be actively made by a fund manager who runs the product and makes investment calls based on research, the economy and also, often, by intuition.
These diversified products can be a great ‘core’ part of your portfolio, around which you can amass some more targeted, individual stock ‘plays’. You can think of these as the ‘satellites’ to your portfolio ‘core’.
Step three: Place your trade
Naturally, online brokers also make this part really easy. It all happens with a couple of clicks.
In terms of how many shares to buy, it’s a simple matter of dividing what you want to invest by the share price.
But there’s another influence on the price you pay. You need to choose between two order types: An ‘at market’ order or a ‘limit’ order.
The first, ‘at market’, is pretty self-explanatory – you simply say how many shares you want to buy and then you get them for the price they are trading at that moment.
With a ‘limit’ order, it’s a bit different. What you do is literally set the highest price you are prepared to pay, bearing in mind that you might end up buying multiple parcels of shares, from multiple sellers, to pick up the total amount of shares you want to buy.
A ‘limit’ order sets the highest share price you are willing to pay and it cannot then go above that.
So you might ultimately, if you want to buy 100 shares in company XYZ, pay $3 for some, $3.10 for others and $3.12 for a third batch, to make up your 100 shares.
For a ‘limit’ order, you also have to set an expiry date.
And that’s it – you’re ready to trade.
The final thing to do is to open your investment eyes so that you are alert for the real-world opportunities. Even in times like these.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.
