Your step-by-step guide to buying shares for the first time
Online share trading is easy - in fact, one of the hardest parts can be choosing your online broking platform. That's because investors are spoilt for choice, and your decision shouldn't be based on brokerage alone.
The key is to check out a few different platforms, comparing price, features and the quality of research you can access, as well as ease of layout.
Setting up a linked account
When you've found an online broker you're comfortable with, you'll need to set up a cash account linked to your trading account. This is where you hold the funds to buy shares, and where proceeds from the sale of shares will be deposited. You can also request to have dividends paid to this account.
Setting up a cash account is straightforward, and the broking platform will guide you through the process.
If you use a broker outside your own bank or a non-bank broker, you may need to open an account with a bank you don't normally use. That means providing ID - usually a driver's licence and Medicare details or a passport number as well as your tax file number, so that you can be electronically identified.
With your cash account up and running, you'll need to deposit sufficient funds to make a trade. The minimum order size for ASX-listed shares is $500 though be sure to allow extra for brokerage. From here, you're ready to start trading!
Placing a buy order
This is where things get exciting. Your first share purchase can seem daunting, but it's super easy.
To place an order, login to your trading account and select the 'trading' option. Next, complete details of the share you want to buy - identifying the share either by the company name or the ASX 'ticker' or stock code. If you use the stock code, be sure you have it right. The ticker code for Woolworths for example is WOW. A simple typo can see you enter WOR, which would see you buying shares in energy company Worley Ltd.
Next, select whether you want to buy or sell - your first trade will be a 'buy'. Enter the quantity of shares you'd like to purchase, or set a dollar limit for your trade.
You will likely be asked to choose the type of order you want to place. A 'market' order means you're happy to buy the shares at whatever value they are currently trading for. Or, you can select a 'limit' order. This lets you nominate the maximum price you're willing to pay (or conversely the lowest price if you're selling the share).
The platform will prompt you to review your order. Check the details, and if all is well, just click on the button to complete your trade. In just a few seconds you can be the proud owner of your chosen shares though it can take up to two days for the transaction to formally settle.
Records to keep
Paper certificates are no longer issued for shares. Instead, your online broking platform can provide a range of reports that are handy for tax time including consolidated lists of your trading activity for each financial year. These will also show the brokerage you've paid plus dividends received if you choose to have dividends deposited into your linked cash account. You should also receive a report from CHESS, the ASX settlement system, for each month that you execute a trade. Store these records for tax purposes.
Reports of dividend payments will be sent to you by the share registries of the companies you invest in. Hold onto these too as they will detail any franking credits you're entitled to claim in your tax return.
Managing capital gains tax
Despite the name 'capital gains tax' (CGT), there is no separate tax that applies to profits made on the sale of shares. The profit is just added to your other taxable income, and tax is levied at your personal marginal tax rate.
What's really exciting is that no matter how much your shares rise in value, you only pay CGT when actually sell the shares. The timeframe you hold onto shares for will determine how much CGT you pay on any trading profits, and this is where you broker's reports are so useful.
On shares you've bought and sold within a 12-month period, you can claim the cost of brokerage as a tax deduction, but beyond this the profit is fully taxable. However, if you've held onto shares for over 12 months, you're entitled to claim a 50% discount on any profit on sale - a big saving.
Working out the CGT on shares can be complicated especially if you trade regularly, and it can be a job best left to your tax professional. If you hand over the records provided by your online broker and CHESS, your tax expert shouldn't have a problem helping you meet the Tax Office rules that can make shares a very tax-friendly investment.