What are shares?
Shares are a type of investment that represent part ownership in a business. They are bought and sold on the share market via a broker or brokerage service.
Why should I invest in shares?
By and large, people invest in shares because they generally offer a higher potential return than other lower risk options, like a savings account or term deposit. A few good reasons to start investing in shares include:
- Diversifying your income streams. Some shares pay annual dividends, giving you an extra source of income and it’s always a good idea to have more than one way of making money. Not only will this give your monthly budget a boost, but it means that if you lose one source of income - like your job - your investments may be another source of income you can fall back on while you sort things out.
- Setting up a long term nest egg. If you opt for low risk shares, you might use your investment portfolio as a nest egg for your future. Just keep in mind that share investment shouldn’t be your only - or even your main - savings strategy, as there’s always the chance the market could turn against you.
- Potential for big returns. Manage your investments wisely, and there’s the opportunity to make a much bigger return by share trading than with a savings account. But, with bigger returns comes increased risk - so weigh up your options carefully.
Knowing the risks that come with share trading is just as - if not more - important as knowing the benefits. For example, while there’s little to no chance of losing your money while it’s in a term deposit, shares are an entirely different story. If you make unwise decisions, or if the market turns suddenly against you, your money could go up in smoke.
How can I minimise share trading risks?
The good news is that although it can be risky to get involved in the stock market, there are ways you can minimise those risks and keep your investment as safe as possible, such as:
- Do your research. The first step is to do your homework on the shares you’re considering buying. Look up the company or industry, it’s history on the market, and what experts expect to see from it in the future. This is the foundation of making smart investments that will work for you, instead of against you.
- Diversify your portfolio. One great risk management strategy that all investors know, is diversifying your investments. If you’ve got shares across multiple different industries, companies and markets, that minimises the chance of suffering losses in all of them at once.
- Don’t overextend your budget. This is especially important when you’re just starting out with share trading. It’s better to start slow and set yourself a conservative budget, so that if you make an investment misstep, you won’t be left with no savings, struggling to pay the bills. Strategies like taking out a margin loan to maximise your investment should be approached with caution, and only by seasoned investors.
- Look into low risk investment strategies. Take some lessons from investors who’ve been there before, and try out some of the top low risk investment strategies around, such as Dollar-Cost Averaging.
Online share brokers vs full service brokers: what’s better?
When you’re looking for a service to buy and sell shares through, there are two options, broadly speaking.
A full service broker offers you advice and recommendations for what stocks to buy and where to invest your money. While that means you get the benefit of their expertise, full service brokers often charge much higher fees.
On the other hand, if you opt for an online share broker, you’ll be in charge of choosing your shares yourself and you won’t get any advice - however, online services often come with lower fees. Some also include access to share market publications so you can do your own research.
Which one is better for you depends on what kind of share trading experience you want.
How do I choose a share account that’s right for me?
When it comes to choosing an account for your share trading activity, you’ll need to think carefully about what it is you personally need from an account. Having said that, there are a few key things you should look out for.
- Brokerage fees. Most share trading accounts charge a fee when you buy or sell shares, called a brokerage fee. Small trade fees are usually charged as a fixed dollar amount, whereas on larger value trades, the fee is often charged as a percentage of the trade.
- Account fees. Many accounts also come with a monthly or annual service fee attached. It’s worth comparing your options, as some accounts have much steeper fees than others.
- Broker reports and share market data. Some accounts include access to independent broker reports and marketplace data, which can help you to figure out your investing strategy. Just keep in mind that the more of these features you have, the higher your account fee is likely to be.
What are the different share trading orders?
A share trading order is how you buy or sell shares. There are a few different trading orders which are handy if you don’t have time to monitor your investments and market movements all day every day.
Here are three of the main types of share trading orders you might use to keep your investing strategy on track.
- Market order. This means you’re buying or selling shares at the best possible price at the time your order reaches the market. Keep in mind that if the price of shares changes between the time you place the order and when your broker executes it, the price may be higher or lower than you were expecting.
- Limit order. This means that you’ve agreed to buy or sell shares once they reach a certain price point. For example, if you’re buying shares, the order will only be executed once the price drops to the one you’ve nominated - or lower - and vice versa for selling.
- Stop-loss order. As the name suggests, a stop-loss order is designed to limit the amount you could lose if shares you hold start falling in value. If your share prices fall to a nominated value, then the stop-loss order is executed as an order to sell them at the best possible price.
What are bonds?
Bonds are fixed income instruments that are issued by governments and companies. When you invest in bonds, you are lending money to a government or company with the expectation that they will a) pay you interest at regular intervals, and b) repay the loan amount at maturity.
What are ETFs, mutual funds and index funds?
ETF. An Exchange Traded Fund, or ETF, is a type of fund that contains a large number of shares and other investments. They are traded on an exchange, just like shares are, but they offer investors greater exposure to the market than a single share would.
Mutual fund. A mutual fund pools money from many people to invest in shares and other assets. They are operated by portfolio managers who decide which assets to invest in and monitor their performance. Unlike an ETF, mutual funds are not traded on an exchange, and trade only once a day.
Index fund. A kind of ETF or mutual fund that’s designed to track a specific index (a benchmark which measures the performance of a particular market). That is, rather than trying to outperform the index, like many active investors set out to do, index funds try to replicate its performance. Because there’s less involved in managing index funds, management fees are generally much lower.