If you’ve started planning for future financial security, you have likely considered investing in the share market to maximise your potential return on investment.
Investing in the share market can be a daunting prospect, but with the right knowledge and expectations, it could be your key to ensuring a comfortable retirement.
Firstly, it’s important to set the right frame of mind about your investment goals. Buying stocks or shares is not a ‘get rich quick’ scenario, but rather a planned, long-term approach to increasing your wealth.
Unfortunately, far too many beginners take the plunge into investing based off a hot tip from a colleague or the success story of a friend, only to be disappointed with a loss because they didn’t take the time to fully encompass the process of investing. It’s vital that you understand the basics before beginning, so let’s start with that:
What is a Share?
Essentially, a share represents a single unit of ownership in a company. Publicly listed companies such as Woolworths, Westpac Bank or Telstra are listed on the Australian Securities Exchange (ASX) – more commonly referred to as the stock market or stock exchange. There are currently over 2000 companies listed on the ASX, many of which you will be familiar with.
How Does the Share Market Work?
The simplest way to understand the share market is if we compare it to an auction. In an auction, we have bidders, a seller, and an auctioneer who facilitates the transaction. In this example, the ASX is the auctioneer who will match buyers and sellers to exchange shares at a specified price.
How Do I Buy a Share?
To buy a share, you will require the services of a third party – known as a broker – who holds a current ASX license in order to process the transaction on your behalf. You can choose to use a discount broker, who will simply execute trades you choose to place on the market, or you can use a full-service advisory broker who will guide you with recommendations and advice as to what companies to invest your money in.
How Can I Make Money from Shares?
You can make money from shares in one, or both of, the following ways:
An increase in share price
Referred to as capital gain or sometimes capital growth, this simply means you make money by buying your shares at one price and then selling them for a higher price.
A share in the company’s profits
Known as dividends, these payments are a portion of the company’s profits and are paid out to shareholders periodically (usually twice a year).
Now that you are familiar with the basics, let’s discuss some important considerations to think about before you get started:
Determine Your Investment Goals
Set an amount you wish to invest, and a timeframe to invest in. Ideally, at the end of this timeframe, you would reinvest any dividend income received from your shares and add any additional cash you may have access to your investment kitty. For example, you may choose to invest $10,000 over a period of two years. At the end of this time, you may have made a return of $900, and you may have saved another $10,000 in personal savings, thereby giving you an additional $10,900 to reinvest into the share market.
How Will You Buy Your Shares?
Will you choose to go it alone and only use the services of a discount broker? Or would you prefer to be guided by an expert in the first few years of your share market journey? Whilst the cost of a discount broker is far less, the ultimate cost of losing your capital through poor investment choices is much greater.
Portfolio Planning
Your group of shares is called your share portfolio. You may opt to invest a considerable sum of cash, to potentially gain access to a broader range of different shares, as opposed to a higher amount of shares in the same company. Having a variety of shares in different market sectors is referred to as diversification, and is an important part of minimising loss and risk.
Choosing Your Investments
Whilst it may seem tempting to buy a higher number of shares for a lower price, rather than just a few shares at a higher price per share, this is generally not a good idea for beginners. Quite often, a company’s lowered share price is due to circumstances that impact the company’s earning ability. The company’s decreased profitability then also minimises your chances of a decent return or any dividends.
Invest for the Long Term
Investing in the share market is not a quick path to success. It’s essential to be patient and remember that a successful portfolio takes time to build. A long-term plan will help to ensure that any market fluctuations have time to be rectified and give you the best chance at financial freedom in retirement.
Share investing can seem like an impossible challenge, but arming yourself with the right knowledge to devise a considered long-term plan will be your best bet. If you would like professional advice regarding your leap into share market investing, the professionals at Super Network can help you. Contact us now for an obligation-free consultation.
Leave a Reply