A newbie's guide to buying shares for the first time
An estimated 900,000 Australians are intending to invest in listed investments in the coming 12 months, according to the ASX's recently released Australian Investor Survey for 2020. These new investors will join the 6.6 million Australians who already own shares. The new investors are 34 years old on average, compared to 46 years for people already invested.
It is easy to see the attraction of investing in shares. The Australian sharemarket has been robust over the past few months and recovered from its COVID lows. At the same time, cash rates are at a record, rock bottom low. Not surprisingly most share investors' common goal is to build a sustainable income stream from regular dividends, according to the ASX.
Most listed investments pay out dividends that you can reinvest or take as cash.
Even next-generation investors aged 18 to 24, who are characteristically risk-averse, are focusing on income and the ASX researchers say this reflects a desire for day-to-day independence among a generation that increasingly sees homeownership as undesirable or unachievable. In contrast, retirees place a higher priority on asset and income protection (21%), although 27% of investors are still focused on capital growth - either on its own or in balance with risk management.
You don't need large amounts of money to invest, in listed investments, making them an accessible method of building wealth for the future. According to the ASX report, people currently investing outside their homes and super, the median portfolio size was $130,000, with 41% of portfolios under $100,000 and 28% under $50,000. The amount non-investors believe they need to start investing is around $4300, down from the last study in 2017 of $6800.
It has never been easier to select broker and register to buy and sell both Australian and international shares. The intense competition between brokers has sparked deep discounting among online brokers as well as a dizzying array of bells and whistles. You can buy and sell shares for $15 or less, depending on the broker and what you sign up for.
What is the best way to stock up on shares?
Keep it simple
If you are starting out, you have two ways of buying shares. You can select individual shares, or you can buy a diversified portfolio through an exchange-traded fund (ETF) or a listed investment company (LIC).
Limit your direct share investments
Don't put all your money into one share - even if it is a blue-chip investment. These can fall sharply too. If you do want to buy direct shares, spread it around and build a portfolio of shares.
Diversify your risk
In times like these, you need buffers against a declining economy and a falling sharemarket. You need a mix of diverse shares because different sectors perform differently at different times. A well-diversified, low cost ETF tracking a broad sharemarket index is often the best place to start.
Understand how long to invest
Shares are appropriate for investment horizons of 5-7 years, not 3-6 months. You can easily sell ETFs if you need the money, but you should be comfortable leaving your investment in place long enough so that short term swings and roundabouts don't matter so much.
Where do you turn for advice?
Further down the list While it may be fun to talk about successful individual share trades with friends, picking winning shares from tips is akin to betting on horses. Even highly qualified people who spend their working days analysing companies only have mixed success.
Company annual reports and website is the top source of information that investors use to make decisions about their investors, according to the ASX. It is followed by online broker websites, then newspapers, the ASX, third party research reports and free online publications.
Further down the list are product disclosure statements for a specific investment followed by friends and family, then research from a financial adviser and online forums and blogs. Social media is towards the bottom of the list.
Draw up a plan
You want to avoid impulse moves into and out of the sharemarket. Stick to your long-term plan and only change it if your personal circumstances alter.
Don't jump into investments just because you have heard about people making money in a speculative company such as a start-up. Fear of missing out is the worst reason to buy. Besides it is probably too late to make the gains your friends have made. Do your research and understand what the company does, the quality of the people behind it and how the company's products and services fit into the economy.
If income is important to you, then you need to know what sort of dividend you can expect from your investment.
For example, the Vanguard Australian Share Index ETF which holds the 300 top Australian shares pays a dividend yield of 3.58% per annum currently.
Some companies pay out a valuable fully franked dividend. A franked dividend is one with a tax credit attached and the more tax a company pays in Australia, the bigger the tax credit. You then use this tax credit to deduct the amount of that credit from your own tax.
Consider joining or starting a shares club
Do you know a group of like-minded investors who like to share their strategies? Why not get together and talk about what you are doing. Some investment clubs have been meeting regularly for years, a bit like a book club, to discuss their investments. Also, there are some shareholder associations that you can, for a fee, join.
Buy and hold
The constant stream of news about the market might tempt you to change how much you have invested from time to time so you avoid dips and maximise exposure to market rallies. However, most experienced investors acknowledge this is very hard to do. The daily financial information that you react to is already reflected in the level of the market. The wiser approach is to only invest the proportion of your assets that you feel comfortable being in the market on an ongoing basis.