The sharemarket is so daunting! How do total beginners get started investing? What steps do you take and what decisions are needed? We talk you through step-by-step.
Getting your head around exactly how to get start investing can be tricky though. It feels like there’s a lot to take in.
For this lesson in Sharemarket 101, let’s look at three ways beginners get started investing. If you had $1000 burning a hole in your pocket, where would you go to invest it in the sharemarket?
This guide to sharemarket jargon will help you as we go.
1. Buying company shares
The minimum amount you can invest in any listed company trading on the ASX is $500. So with $1000 you can directly buy shares in just one or two companies.
Depending on your reasons for investing, buying shares in large companies that pay dividends to shareholders twice a year might be a good strategy. Australia has some of the highest dividend paying companies in the world. It’s also generally agreed that shares that pay dividends are more stable and resilient. So dividends offer a stable contribution to a an investment’s total return, reducing the year-to-year volatility of capital gains.
Note that while reinvesting your dividends is a good strategy for growth, the share price itself of bigger companies will probably not grow significantly. That’s why this kind of investment is considered ‘conservative’ – lower risk equals lower returns.
If you’re looking for growth, it may make sense to invest in smaller companies. Many don’t pay dividends, but there’s more potential for the share price to increase. Smaller companies are a higher risk investment that offer a higher return.
You can choose exactly which companies you invest in, and at what price.
- How will you know which companies to invest in?
- Being invested in only one or two companies doesn’t provide very good diversification. Diversification is important to spread risk. To improve this you could choose companies in different sectors (such as a retailer and a miner), or invest in a blue chip and a growth stock.
How to get started buying company shares
The cheapest and easiest way to buy shares is by opening an online share trading account with a broker. There are a number of different options, each structured slightly differently. Some to look into are:
Commsec is one of the more expensive platforms but it has a wealth of information available to you for free.
Similar to Commsec, NabTrade gives you lots of information to help you find your feet. They offer international shares as well.
E*trade is a cheap and usero-friendly option that’s worth investigating.
2. Buying into an exchange-traded fund (ETF)
Rather than directly buying shares in companies, you could invest your $1000 in an ETF.
ETFs are funds that invest in different companies or other assets. They can be purchased or sold on a stock exchange the same way a regular stock can. When beginners get started investing, ETFs can feel less daunting than directly investing in companies.
Find a comprehensive lesson on ETFs here.
There are more than 200 ETFs trading on the ASX. Some track an index like the ASX 200, while others focus on a single sector, like energy or property, or on commodities, or on US or global markets.
As the minimum investment in an ETF is $500, you could buy into one ETF or split your money between two funds.
- One of the main benefits of investing in an ETF is diversification, as the fund is invested in a variety of shares or other assets.
- You can also gain exposure to asset classes or overseas markets you may otherwise be unable to access as a small investor.
- The companies who create and manage ETFs charge a fee, which is reflected in the daily price of the ETF.
- And while you can choose the ETF you invest in, you can’t choose the exact assets or shares it’s invested in, or the price that it buys and sells these assets at.
Getting started with an ETF
It’s easy to buy and sell ETFs yourself, using an online broking platform. It works the same way as when you buy and sell company shares (see above).
3. Buying overseas shares
The $500 minimum investment rule applies to the ASX, but not necessarily to other stock exchanges around the world. You could get more bang for your buck by investing in a foreign stock exchange, so it’s worth looking into when beginners get started investing. Thanks to technology, many of Australia’s largest online brokers offer the option to invest in overseas shares. So overseas investing can actually be far less daunting than it sounds.
- You may be able to spread your $1000 further and invest in a wider range of companies, for better diversification.
- Overseas stock exchanges allow you to invest in the world’s biggest companies.
- Brokerage can be higher when trading foreign shares.
- There can also be a currency exchange rate risk when buying and selling.
- There’s also the possibility of a knowledge gap, if you’re not able to track the activities of the companies you’re invested in as closely as you may Australian companies.
Getting started investing overseas
There’s a good overview of how to get started here. The main takeaway is to find a broker with good experience in overseas markets. And keep an eye on fees.