Those who have never owned shares before will be surprised at how easy it is to get started. Very simply the process is:
- Open an account with a broker
- Research what you want to buy
- Log into your broking account and place your order
- 3 days later, you’re a share investor
In contrast to property, there’s no stamp duty, and the transaction costs are typically less than $30. And whilst shares should always be considered long term investments, it is nice to know that if your world turned upside down, they could be sold just as quickly as you bought them. Plus, once you own them, there’s no cost or effort required to retain them. Something a landlord certainly can’t attest to.
With interest rates at historic lows, building up long term savings in a bank account will be a very, very slow road. Property prices in Australia have gone through the stratosphere in recent years so that even an entry-level investment requires a large deposit and the pressure of a huge mortgage to match. Shares leap out as the opportunity for those looking to build wealth and financial independence to make a start.
The above is a very high-level summary of how you get started investing in shares. Let’s explore things in a bit more detail, and also discuss some of the most common questions new investors ask, such as how much money do I need to start investing in shares.
Before making your first share investment, you want to be clear on your investment objectives. Are you trying to build up your share portfolio so that you can sell it all in 5 years and buy a home, or are you trying to create a passive income stream for yourself later in life?
If you have a partner, check with them that you’re both on the same page. You’d be amazed how often I get new husband and wife clients in, and their vision for years ahead differ greatly. Sitting down with me seems to be the first time they’ve had a discussion of what their preferred future looks like.
It may be that you have more than one objective. For instance, building a portfolio to enable early retirement, whilst also wanting to pay off your mortgage. To move forward with starting your investment portfolio, you need to determine which of these is more important. There are occasions where you can be working on multiple goals at once, but there are plenty more times where a sequential approach is more appropriate. In this example of wanting to build an investment portfolio to enable early retirement, whilst also wanting to get the home loan paid off, I would normally encourage clients to get the home loan goal achieved first, and then think about the early retirement goal. Now this is not always the right answer, but the point is when you have multiple goals, you need to think through carefully whether you can work on them all at the same time, or whether some need to be put on the back burner.
In the house deposit example above I mentioned a 5 year time frame. Clarity on time frame is really important as it determines the level of risk that you can take. Risk and reward are intertwined, but it’s important that you don’t chase a return without considering the level of risk attached. You might want a 10% return, but if your time frame is only 3 years, the level of risk required to get that return is just too high.
Matching your time frame to your level of risk is crucial when thinking through how to start an investment portfolio. Here’s a very rough guide:
Time frame of 2 years or less – bank deposits
2-4 years – Consider some sort of conservative or balance fund that has less than 50% of its total assets in shares and property.
5-7 years – look for a growth fund mix that is majority shares and property. Depending on personal comfort levels, at this time frame you could even go out to 100% growth assets – shares and property.
7 years+ – typically 100% growth assets, and if you have the appetite, quite possibly incorporate some gearing in there too to magnify outcomes.
So in summary:
- Your goal determines your investment time frame.
- Your investment time frame determines how much risk you are able to sensibly take.
- How much risk you are able to sensibly take determines your return.
How much money do I need to start investing in shares?
This is perhaps the most common question for those looking to get started investing in Australian shares.
The technical answer is – very little. You could probably invest $10 if you wanted. But you wouldn’t, because to buy the shares you would pay brokerage of around $20, and then to sell them down the road you’d have to pay another $20 or so. So the cost of doing the transaction would likely far outweigh any potential profits.
Practically then, I’d suggest you would want at least $2,000 to start investing in shares, and at that level you should probably consider an ETF – exchange traded fund. You buy ETF’s on the share market exactly the same as a regular share, but each ETF will hold a portfolio of underlying shares – typically 200-300 and sometimes far more. So in buying a single ETF you achieve huge diversification – essential in managing risk. And you achieve this diversification whilst only paying one lot of brokerage.
If you wanted to invest in specific individual shares, then having $10,000 as a minimum would be wise. With this sum you could buy $2,000 worth of 5 different company shares. If you take care to spread across industry sector, (for example financials, health care, consumer staples, resources etc.) then you could get reasonable diversification at this level.
How do I start buying shares in Australia?
You need a share trading account.
A good place to start is to see if your bank offers share trading. If so, setting up an account through them is likely to be the most painless, as they will already have all of your identification details.
Compare fees – how much they will charge per trade. Online broking is very competitive these days so price competition is intense – great for you!
But of course fees aren’t everything. When deciding which broker to sign-up with you might also want to look into what research they provide. Depending on how you plan to build your share portfolio, you may well want access to research, and it’s likely to be cheaper to pay a little more per trade if research is provided free as part of the package.
How many shares should a beginner buy?
Think in terms of dollars to be invested rather than number of shares. Some shares sell for 1 cent or even less, whilst others sell for hundreds of dollars. Buying the 1 cent share because that means you get a great number of shares makes no sense and certainly isn’t a way to build a share portfolio that is likely to deliver on your investment goals.
Can you make money from shares?
Of course! When you buy a share, you become a part owner in that company. If that company makes profits, you get a slice of those profits. In most businesses, some of the profits will be paid out to shareholders as dividends, with the remainder of the profits pumped back into the company to enable it to grow – research and development, marketing, or perhaps an acquisition.
The return from your share investments therefore has two components:
- Dividends – the regular income that you receive, typically paid every 6 months.
- Capital Growth – the amount your shares grow in value over time. This reflects the success of the business, and the use it puts retained profits to.
Can I buy shares without a broker?
Not really. Occasionally there might be an opportunity through a float, like we had a few years back for Medibank when the government decided to privatise it. And sometimes you can receive shares as an employee of a company, where no broker is involved. But whenever you want to sell these you’ll need to deal with a share broker, and in most cases you’ll need a broking account to buy too.
What’s the difference between Shares and Stocks?
There is no difference. Here in Australia we call them shares (as do the British), in the US they call them stocks. The terms are interchangeable.
Is investing in shares risky?
From past experience I know that whenever I suggest that shares are a good investment option I always get someone email me and say that I didn’t talk about the huge risk associated with investing in shares. “What about the GFC” they say, “my neighbour lost everything”.
So let’s tackle the shares are hugely risky myth head on.
As an investor, you want some risk. No risk means no investment return. Risk and return are opposite sides of the same coin. What you need to decide is what level of risk you are comfortable with. If you are only comfortable taking on the risk of not keeping pace with inflation, then cash in the bank is the investment for you. If you want to earn more like 5%, then you need to take on only a small amount of investments that have any volatility associated with them, but in the current interest rate climate at least, you do need to take on some risk. If you seek a 20% return per year, then you’re going to need to take on a whole heap of risk, probably including borrowing to leverage your outcome (I would suggest that seeking a 20% return per year over an extended period is unrealistic and highly likely to lead to you losing money).
So risk is not bad, but understanding the level of risk and what you are comfortable with is very important.
Next, what does “risk” actually mean? Technically it means volatility. To most people, risk means the chance of them losing their money. The more stable the value of an asset is, the less risky it is considered. An asset whose value changes a lot is considered more risky. This is because you may need to sell your investment, and if you’re unlucky enough to sell at a point when the price is down, you may have a bad outcome, perhaps even get back less than the amount you spent buying the asset in the first place.
Because shares are constantly bought and sold, prices are always known. They go up and down as a business’s fortunes rise and fall, and as external factors weigh on the price people are prepared to pay for the company’s shares. This leads to the view that shares are a volatile asset and therefore they are risky.
The thing is though, all the price is telling you is that, if you wanted to sell right now, here’s what you could get for your share. If you have no intention of selling, the price really doesn’t matter. Rather than being a negative, the fact that you could sell almost instantly if you wanted to should be viewed as a positive. Something unexpected comes up and you need cash fast. You could sell your shares and have the cash in your bank account in 3 days. That’s faster than breaking the term on a low risk term deposit.
And so onto the “lose all my money” claim that always comes up, though it’s always the friend or neighbour this has happened to, never the person themselves.
Firstly, shares are cheap. Most quality shares cost between $10 and $50 each. So even if you only have a few thousand dollars to invest, you can afford to buy shares in a few different companies, ie. diversify. Now I would suggest that you don’t even buy individual companies, but rather Exchange Traded Funds (ETF’s), that give you even more diversification, but that’s a discussion for another day. The point is, you never have your entire share investment in a single company. In 2008, the period we now know as the GFC, the share price of most companies fell. But they didn’t go to zero. For an investor to have lost all their money, as the claim often goes, that’s what’s needed. But that is incredibly rare. And even if you’re unlucky enough to buy into a company that suffers that fate, you will have invested in several different companies, and they won’t all have succumbed to that fate.
Now if you were forced to sell when the price of your shares were down, you will get back less than what you originally invested. But almost everyone who suffers loses on their share market investments doesn’t sell because they actually have to, they sell because they feel they have to. I’ve seen it so many times and yet it still makes me feel sick in the stomach. The number of people who for instance don’t need their superannuation savings for 10 or 20 years, yet when share markets go down, they feel they have to sell. It just boggles the mind. Please, please, please, if you take absolutely nothing else from this post, please don’t sell your share market investments when prices are down just because of fear or panic. If your shares are in a good company that’s continuing to pay regular dividends, don’t give your shares away to some bargain hunter at a discount.
Here’s the key things you need to be aware of when thinking about investment risk, and this applies to both shares and property:
- Time is your friend. Plan your investment strategy so if the price goes down, you don’t need to sell. You can wait it out.
- Some risk, or volatility, is good. It’s why you get a return better than cash. You want some investment risk.
- Diversify – it’s a well-worn cliché, but don’t put all of your eggs in one basket.
- Be wary when borrowing to invest. Borrowing magnifies outcomes, both positive and negative. I believe borrowing is essential for most people in achieving financial independence, but recognise that you are playing with fire and so it needs to be managed well.
In my book Financial Autonomy – the money book that gives you choice, we step through the framework below. The content covered in this blog and podcast explore each of these steps. Learn more – down a free sample of the first chapter here.
BONUS CONTENT – How to start an Investment Portfolio – podcast:
Resources & Links
- Invest in Shares with Confidence – Online Course
- Investing – How to get Started – Free Toolkit
- Free sample chapter – Financial Autonomy – the money book that gives me choice
- How to Buy and Sell shares – Money Smart Article
- The power of gearing – how smart borrowing can accelerate your journey to financial autonomy – Episode 25
- Investment basics – Active vs Passive investment – what’s it about and, our approach – Episode 58
- 7 Essential Australian Resources for Investing in Shares as a Beginner
- How to start an Investment Portfolio