Investing Money For Beginners Australia – Investing money is one of the best ways to build wealth. It doesn’t matter whether you’re young or old, you can easily learn how to invest today and start building your wealth tomorrow.
Many people think that investing for beginners Australia is actually a very complex task. However, if you are aware of the basic rules and requirements, then the whole process becomes way simpler. If you are thinking about your finances for the future then it’s time to start an investment program that will eventually help you in reaching great heights.
What is a share and how do I buy one?
At its simplest, a single share represents a single unit of ownership in a company.
Companies such as Commonwealth Bank of Australia, Rio Tinto and Woolworths are listed on the Australian Securities Exchange (ASX) — commonly known as the stock market or stock exchange. Although these big names are among the most well-known, more than 2,000 companies are listed on the ASX.
When you buy shares in one of these companies — even a very small number of shares — you then own a small part of that business.
You need to use a third party, called a ‘broker’, to conduct the actual transaction of buying or selling shares.
How can I make money from shares?
People aim to make money from investing in shares through one, or both, of the following ways:
An increase in share price. Usually known as ‘capital growth’ or ‘capital gain’, all this means is that you make money by buying your shares for one price and selling them for a higher price. Conversely, it’s important to remember that if the share price falls below the amount you paid and you sell your shares at this lower price, you would lose money.
A share in the company’s profits. Usually known as ‘dividends’, these payments are a portion of company profits paid out to shareholders, usually twice a year. Companies don’t have to pay dividends, but many see it as a way of returning earnings to their shareholders.
How do you learn to invest?
The sooner you start to get the knowledge you need, the quicker you can get to a point where you can feel confident.
It’s important to educate yourself about the economy, interest rates, exchange rates and government policy, and understand how these factors may affect a company’s performance, says the Australian Government’s MoneySmart website.
The ASX also has a share investing education section on its website.
CommSec Pocket lets you invest anytime, anywhere, with as little as $50. Choose from seven themed investment options to easily invest in something that appeals to you – like tech, sustainability leaders, or the biggest 200 companies on the Australian market. Gain experience by using the app and CommSec will help you along the way with bite-sized tips, videos, and articles to teach you all about the share market.
How much do you need?
Most brokers would require the first trade to be at least $500 which would be referred to as the ‘minimum marketable parcel of shares’. The size of increments or additional purchases thereafter would be at the individual broker’s discretion.
The ASX suggests you should “start your share investing with at least $2,000” as a general guide. Understanding the costs involved should help you decide how much you want to invest.
Starting small
When you buy or sell shares, each individual transaction incurs a brokerage fee in addition to the price of the shares themselves. This means the less you invest, the more the fees will be as a percentage of your total investment.
For example:
- If brokerage costs you $19.95 and you buy $600 worth of shares, brokerage will represent just over 3.3% of your investment.
- If brokerage costs you $19.95 and you buy $5,000 worth of shares, brokerage will represent 0.4% of your investment.
The point is, if you start with a small amount of money, the company you invest in may have to perform far above the average rate of return for you to make enough money to even cover your costs, let alone turn a profit, when you eventually sell your shares.
On the other hand, it is important to understand shares are considered the riskiest type of investment and the more money you invest, the more of your savings you are effectively opening up to that risk. You need to be comfortable with the possibility of losing the money you put into the share market.
How do you choose which shares to buy?
Researching and choosing companies to invest in can be enjoyable and there are lots of tips and recommendations to guide you through the process.
MoneySmart suggests starting with companies in an industry that you know something about, as this may make it easier for you to understand how a business is doing.
10 Things to Remember about Owning Shares
Investing in shares is a great way to increase your wealth. Stock market crashes do happen (as we saw in the global financial crisis of 2008–09), and there can be a long, slow path to full recovery, but if you’re patient, have assessed your risk carefully and have a diversified portfolio that performs well, your nest egg will grow. And don’t forget — owning shares should be fun. Enjoy it!
- Shares go up in price, and also down. If you buy shares at a high price and the market falls, you may lose money. But if you buy more shares and the price goes up, you’ll make money on the sharemarket.
- ‘Get rich slow’ should be the share investor’s motto. Shares have an excellent long-term track record of generating wealth. If you choose your shares wisely, they’ll build your wealth better than almost any other asset — if you invest for the long term.
- Shares are a risky investment. Because shares generally produce a better return than other assets, they carry more risk, mainly because they’re more volatile in price. Using shares as a short-term gamble can give some big wins, but this strategy is fraught with danger.
- Shares provide the best return on investment. You take an added risk by holding shares because they provide better returns than other investments. Investment is about creating wealth first, and then using that wealth to fund your retirement. You need the capital gains that shares can bring.
- Shares need time to increase in value. With enough time and diversification (buying a range of shares spread across the economy), you’re unlikely to lose on the sharemarket. If you’re impatient, and you’re not well diversified, you can easily lose money in shares.
- Sharemarket crashes do happen. The sharemarket suffers occasional alarming falls, but has never failed to get back to, and subsequently exceed, its previous high point. But sometimes (as in the aftermath of the 2008–09 crash) it just takes a bit longer!
- Shares bring wealth through the magic of compounding. If you reinvest your dividends from shares, the rate of return you earn will be cumulatively larger than the amount you initially invested. Over time, compounding has the effect of accelerating the growth of your wealth.
- Owning shares means tax advantages. Your tax situation can benefit from using the tax advantages that come with fully franked dividends.
- Owning shares means you’re also a company owner. When you buy shares, you’re buying a share of the company’s assets and its profits. In fact (and in law), you’re a part owner of the company.
- Sharemarket investment is fun. The sheer range of things that companies do is interesting and informative, and unlocks the mysteries of that nebulous beast, the economy. It’s never too late to learn about shares, and it’s a wonderful interest to give your kids.
Factors to consider when making investment decisions
Before putting your money into any investment option it’s important to make sure you understand, and are comfortable with, the level of risk involved, the investment timeframe, any potential costs involved, and how the product could help you reach your financial goals.
It’s also important to look into any potential legal and tax implications, as these can vary depending on the type of investment you make.
Risks involved with investing
Different types of investments carry different levels of risk which can influence the returns you may receive. People tend to have different appetites for risk, so it’s important to understand yours before investing. The AMP Investment Style calculator can help you to understand your risk appetite..
Generally, investments that carry more risk are better suited to long-term timeframes, as these often come with greater short-term volatility, which means they can change rapidly and unpredictably. However, being too conservative with your investments may make it harder to reach your goals.
Diversification
A good way to manage risk can be to spread your investments across different asset classes. This is known as diversification, and is one of the first things you will learn about when looking into how to invest for beginners.
Diversification reduces your overall investment risk and leaves you less exposed to a single economic event. So if one sector or asset performs badly, the other areas of your investment may not be as badly affected.
It can also be a good idea to diversify within asset classes. For example, a share portfolio may hold shares across different sectors such as banking, resources, healthcare and technology, and across both domestic and international markets.
Conclusion
Learning how to invest for beginners is not as difficult as it may seem. Many people believe that you need a lot of money to buy stock, bonds or mutual funds. However, this is not true. Once you begin to learn the ins and outs of investing, you will see how simple it really is. This is why Investing Money For Beginners is g