Investing on the stock market can often be a daunting task. Especially if you’ve never done so before.
You have to grapple with the idea that your hard-earned money is going to buy shares that could either go up or down. You could make gains if you buy and sell at the right time. But if you hold on for too long, you may just lose your dough.
So here at Markets & Money, we thought we’d help to ease the stress you may be feeling with a ‘How to’ guide on buying shares.
First, let’s cover the basics of what a share is, and what you could be buying into.
Buying a share means you’re buying a part of a company. When a company decides to become publicly traded, their aim is to raise capital.
To raise capital, the company lists on a securities exchange. In Australia, that’s the ASX (Australian Securities Exchange). In the US, it could be NYSE (New York Securities Exchange) and in London it’s the LSE (London Securities Exchange). The initial capital raising is called an IPO (initial public offering). After the shares have been sold and the capital raised, these shares then go on to list on the securities exchange. From there they can be freely traded between investors.
Now, you’ll most likely be buying something called ‘ordinary shares’. Each share provides you with the right to one vote, and the ability to receive dividends. There are four different types of shares you can buy, including the already mentioned ordinary shares. There are preference shares, contributing shares and company issued options. Today, we’ll only be discussing ordinary shares.
Now that the basics are out of the way, let’s get stuck into how to buy and sell shares.
Step One: Find a Broker
The role of a broker is to act as the middle man between their client and the securities exchange. They’re able to buy and sell shares on your behalf.
Now, you have two options. You can either hire a ‘full service’ broker who gives advice, or a non-advisory broker.
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A full-service broker will, as you might expect from the name, provide you with advice and recommendations — especially to any risks involved. Whereas a non-advisory broker will simply invest in whatever you ask them to, with no comment. Non-advisory brokers are usually cheaper than a full-service broker.
Most non-advisory brokers are online and can usually be found through a bank or the ASX.
Many who trade on the ASX use common online trading services. This includes CommSec and E*trade.
Step Two: Sign-up
When you decide on a broker, whether that be face-to-face or online, you also have to decide whether your account is for individual or joint use; on behalf of your SMSF; or as a trust — family, minors, etc.
Once you’ve settled that, you’ll have to be willing to provide a number of personal details. These will include things such as:
- Name, residential address, contact details
- You may need to provide your citizenship status
- If you’re looking to set up an SMSF or trust account, you may need to provide extra details
In any case, under most circumstances, you’ll need to provide 100 points of ID. Whether that be your passport, driver’s licence, Medicare card or your birth certificate.
During the sign-up process, prospective investors will need to create a share trading account from which money will be withdrawn to buy shares, and where it will be deposited when the shares are sold.
Then it’s as simple as transferring funds from your cash account into your share trading account.
Step Three: Buying Shares
Before buying any stock, you need to do your research. Make sure that you are comfortable with the company. Don’t just buy the stock for the sake of buying.
Here at Port Phillip Publishing, in our premium publications we regularly recommend shares. Please remember that these recommendations are always general advice, and they don’t take into account your specific personal circumstances. For individual advice, you should speak to a financial adviser.
You also have to make sure you’re buying at the right time and not just because you want to rush in. Try not to get caught up in the hype around the latest hot trend. Even the best company can lose you money, if you invest at the wrong time, when shares are high and due for a correction.
Picking your moment to buy can be difficult, and the skill usually comes after you’ve been investing for quite some time. This is another place where the right advice and recommendations can help you get started.
But remember, investing in stocks is risky. There is usually never a ‘perfect’ time to buy. And even the most careful investor will sometimes make losses. You should never invest more than you can afford to lose.
Step Four: Selling Shares
Selling shares may be even more daunting than buying them.
If the stock you’ve bought is falling, then the decision to cut your losses and sell could be considered easier than in other scenarios. But you also may be tempted to stay in the stock and wait and see if you can regain your losses.
If your stocks are on the rise, then selling your shares may seem counterintuitive. You’ll most likely want to wait and see if the stock will climb higher. But if you wait too long to sell, your gains could disappear.
Ultimately, the decision will come down to your own circumstances. Are you planning to hold onto a stable dividend paying stock, collecting income for years? Or are you speculating with some ‘play money’ in a risky, but potentially hugely-rewarding small-cap stock?
Whatever your reason, when the time comes to sell you’ll need to either contact your broker or place the trade directly online. Once the trade is completed, just like when you buy shares, you’ll be charged with a brokerage fee. The settlement of the change in ownership will roughly take two days. After that, the money will be transferred back into your elected account.
Step Five: How to protect yourself from losses
As we’ve mentioned several times, investing is an inherently risky prospect. You should never invest money that you can’t afford to lose. And you should consider strategies to minimise your risk.
One way to do so is to set up a stop-loss figure. This is basically a price at which you will sell your shares, if they fall to that level.
For example, say you invest in a company which is selling stocks for $2 apiece, and you set your stop-loss at $1.70. Once the share price falls to that point, you sell. This has limited your losses to 15%.
Stop-losses can simply be a number in your head. Meaning that you’ll be responsible for monitoring the share price and selling if it falls to your stop-loss level. However, these days many brokers allow you to set up automatic stop-losses, so that you can ‘set and forget’ them.
A slightly more advanced method is the ‘trailing’ stop-loss. This means that, as your shares rise in value, the stop-loss ‘follows’ them up. This means the stop-loss doesn’t just limit losses but can also protect some of your gains.
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Say for example you bought a share valued at $2 and set your trailing stop-loss at 15%. If the share then immediately fell to $1.70, as in the above example, your stop-loss would be triggered, and you would sell. But what if, instead, it doubled in value? Now the shares are worth $4 each. This means that your stop-loss level from this new high is $3.40. If prices fall from here, that won’t change, and it may be triggered. But if they rise, the stop-loss will continue to trail them upward.
Keep in mind that stop-losses are no guarantee. Sometimes the stock market can ‘gap’ up or down. This is when prices suddenly change, without going through the intervening levels. It can often happen when markets first open in the morning, or when a stock emerges from a trading halt and starts changing hands again. If a stock price gaps downwards, it might go straight past your stop-loss, meaning that you would sell for a lower than expected price.
Another important consideration for stop-losses is how close they should be to the price. With a highly speculative, risky investment, a tight stop-loss is likely to be triggered very quickly by day to day volatility. You may have to set much looser stop-losses for speculative investments than you would for more stable shares.
Where to set your stop-losses is a highly personal decision, affected by your circumstances and risk tolerance.
The share market can be a confusing and daunting place for beginners. So, it would be wise to start off small, and then slowly grow your investments over time as your confidence builds.
Setting stop-losses in place helps you to navigate your risks more easily and allows you to choose how much you are willing to risk.
Remember to research the companies you wish to invest in, to make sure you’re comfortable with the business and where they are headed, and also seek financial advice.