Interest rates at an all-time low in Australia and real estate prices are tumbling. So naturally more people have become curious about shares as a way of getting some reasonable return on their investment.
The stock market has performed well since the global financial crisis ten years ago, although the final quarter of 2018 did see a hiccup. As of March 27, the All Ordinaries has climbed more than 8.5 percent since the end of 2018.
If you have money to invest and can mentally handle the short term volatility, shares can be a good option for long term returns.
But how do you get started if you’ve never bought shares before?
1. Select a broker
Much like how conveyancers or lawyers handle real estate transactions, everyday folk need to buy or sell shares using a stockbroker.
In the old days, this was an actual person sitting at a desk, usually taking a commission on each purchase or sale – called a brokerage fee.
These days, there are numerous online stockbrokers, which are cheaper and easier to access (24 hours and 7 days a week, no appointments!) than human brokers.
The major banks all have such a service – CommSec at Commonwealth Bank and nabtrade at NAB are two examples – that will charge a percentage brokerage fee or a flat fee per transaction.
There are also independent brokers that are not aligned with a traditional financial institution – IG, CMC Markets and BellDirect are some of the more familiar names in the market.
Then there are specialist brokers that serve people with particular needs. Startup broker Stake, for example, allows Australians to buy and sell US shares for zero brokerage (it makes its money from taking a percentage out of the currency conversion).
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A bit like insurance, there are many online sites that will allow you to compare the different online brokers. As a beginner, the brokerage fee will probably be a major consideration – and some charge as low as $8 per transaction.
But CMC Markets head of sales trading Ashley Glover told Yahoo Finance that there cheap isn’t always the best.
“When selecting a broker there are four key considerations: cost, service, education and analysis tools,” he said.
“Service – whilst their brokerage costs might be low, it’s important to consider that their service may lack as a result. Check if the broker has won awards for providing a quality customer service.”
One warning: there have been many instances of stockbrokers going broke and investors losing their money – even though theoretically investor assets are not the company’s property so it should all be preserved. The collapse of Halifax Investment Services late last year is a tragic example, with $20 million of investors’ money just disappearing into thin air.
Choosing a broker backed by a large, reliable institution will reduce the chances of such a disaster. But nothing in life is a guarantee.
2. Open a cash account
Now you’ll need a bank account to hold the money that you’ll invest and receive the proceeds from selling shares.
Most brokers will create a cash account for you upon registration. For example, when you apply to be a new customer of CMC Markets, the broker will open a new Bankwest account for you purely for the purposes of funding share transactions.
An alternative to this, especially if you’re using a broker backed by one of the big banks, is a cash management account.
This allows you to just park all your cash in one place to do everything – share trading, paying off your mortgage, depositing your salary, paying off your credit card. Such an account makes it easier to see how your finances are in one view, and saves you the hassle of transferring funds between different bank accounts.
3. Decide your strategy
Individual circumstances demand individual investment strategies, so it’s best to seek your own advice about what shares to go for to start your portfolio.
“When starting out it’s important to set clear investment goals – these will ultimately guide your strategy,” CMC’s Ashley Glover.
“For instance, are you investing for a house deposit to use in the next five years or perhaps for your retirement in 20 years’ time? Both will require different investment and trading strategies. Knowing your appetite for risk is also key and will help inform both your strategy and share selection.”
At a very high level, one can make a choice between growth shares or dividend stocks. Dividend is a payout made by the company to its shareholders regularly or irregularly. If you’re used to real estate, you can think of this as rental income.
In Australia, there are more companies with high dividends than other countries because of favourable tax conditions for shareholders. These firms are usually established companies with a reliable revenue and profit stream, like the big four banks.
Growth shares are companies that are concentrating on scaling up, so will often not provide any dividends but will reinvest such cash back into the business. The theory is that the value of these shares will climb up as the business grows its clientele. In real estate terms, this is capital gains – the price of your investment property going up.
These growth businesses tend to be smaller firms that are trying to work their way up in their industry. There is a risk that the business might stumble and fall, but there’s also a chance that it will gain market share and become a successful player.
Amazon is arguably the most famous of these, as it has never paid out a dividend – but its investment back into the business has seen its share price climb spectacularly.
Spectacular, as in a US$100 investment at its IPO in 1997 would now be worth more than US$100,000.
There are also shares that don’t represent one company but a mixture of many. Exchange-traded funds (ETFs) represent a portfolio of different stocks, while real estate investment trusts (REITs) represent a portfolio of properties. These can be a good way to start if selecting individual companies for investment feels too intimidating or risky.
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