5 tips for Australian ASX share trading beginners in 2022
Do you want to start investing? Here are 5 tips you need to know
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Corporate Authorised Representative No. 1292963 of Sanlam Private Wealth (AFSL No. 337927).
Sponsored by GO Markets Securities Pty Ltd.
Special Offer: $385 worth of free brokerage when you transfer your HIN.* Simply transfer your existing HIN before September 30. T&Cs apply. Corporate Authorised Representative No. 1292963 of Sanlam Private Wealth (AFSL No. 337927).
Investing in Australian companies is a great way to build your personal wealth, even if getting started might seem a little frightening at first.
But for first-time retail investors, know that you are not alone.
Research from the Australian Securities Exchange (ASX) shows that over 9 million Australians are currently investing in the market, with over a quarter of those investors starting in the last 2 years.
So while you'll still need to overcome the complexities of investing, there are plenty of retail investors just like you who are currently in the market.
In order to get you started, Finder, with some help from our friends at GO Markets, have come up with 5 tips for beginner investors.
1. Benefits of CHESS-sponsored / having a HIN (Holder Identification Number)
Let's start with CHESS-sponsored shares.
In Australia there are 2 options for investors: sign up with a broker (like GO Markets) that offers CHESS or one that does not. And while it might not seem like a big deal, it can be incredibly important, so make sure you know if you want to be CHESS-sponsored or not.
Established nearly 3 decades ago, the Clearing House Electronic Subregister System or CHESS is a computer system used by the ASX for share settlements and registrations.
Basically it is a lot of words to say these shares will be put in your name.
You can also buy via a custodial broker which means that the shares are bought on your behalf. While you will still own the shares and can transact in them, you may miss out on some of your rights, so do your homework before choosing a provider.
As GO Markets analyst Lachlan Meakin explains, CHESS sponsorship is very important as it provides investors their own Holder Identification Number (HIN), allowing investors better visibility and security over their entire shareholding portfolio.
"Having a HIN registered under the investor's details also provides better transparency and portability compared to a custody model, where all the investor's shareholding are held under the company on a single HIN," Meakin said.
2. Tips and intro to valuing stocks
Now that you know who you're going to buy your shares with and whether or not you're going to choose a CHESS-sponsored broker, it's time to work out a fair price for what you're buying.
In share trading money is made in 2 ways, either through dividend payments or through appreciation of a share price.
In order to value a share, investors can use a couple of different models. Some investors prefer to look at the price to earnings (P/E) ratio while others will look at discounted cash flow.
But how do you know if you're paying a fair share price for a stock?
Talking beginner investors through how to value companies, Meakin said "the most basic and first valuation is the market capitalisation which is just the number of shares X share price. All other measures can then be compared to this as a starting point".
"Different financial ratios such as P/E ratio and EPS, etc, can also be used in conjunction to evaluate the company's health," he explains.
The analyst points out that it is essential to use these valuation tools to measure against competitors within the same sector to give yourself an accurate comparison of a potential investment's worth.
Meakin also points out that other comparison tools including a DCF model might take a little bit of time for newer investors to understand.
"The DCF model is quite complex and can take a great deal of practice to get right. It may not be as suited to small-cap companies with little to no cash flow. Instead, it is better to value larger companies and how their cash flow can be valued relative to their price. It is, however, an important tool," he said.
Why do companies have different sized P/Es?
While a P/E can help explain how a business has previously performed, Meakin notes businesses will have different P/Es depending on the sector they are in and the future of the business.
Take for example a company like Twitter and a rich billionaire who wants to pay for it. The company is losing money, meaning its earnings are negative. As such, it currently has an estimated minus 972.8 P/E based on expected numbers when the giant goes to market.
But just because it isn't making a dollar today doesn't mean it can't tomorrow. This could be the reason why Elon Musk is so interested in the social media platform, which he has recently purchased for AUD$61.4 billion.
However, investors, especially those who are newer to the market, should note these models only give estimates. They rely on past data and assumptions on the future. This means they aren't 100% accurate in determining what to pay.
3. Learn about dividend stocks and IPOs
So now that you know who to sign up with and roughly how to valuate companies, the next logical step is to work out exactly what you want to own.
Talking through two types of investing strategies, you choose to buy dividend stocks or initial public offerings (IPOs) shares.
As Meakin explains, IPOs come with more risk but have the potential for higher returns, while dividends often favour those who are to accumulate wealth over many years.
"Conservative and long-term investors would normally look towards investing in dividend-paying shares, as dividends can provide a regular source of income," he said.
"IPO investment carries some investment risk. Maybe you'll make a lot of money on a single trade, and perhaps you won't. An IPO allows investors to invest in companies at an affordable price at the start of their growth."
But of course, you don't have to be in one camp or the other. You can have a mixture of both as part of a well diversified portfolio.
The GO Markets share trading platform has "Upcoming Floats" and "Declared Dividends" sections to help kickstart research.
4. Besides just individual stocks, ETFs are baskets of stocks that help you diversify
You're probably familiar with the term "don't put all your eggs in one basket". This is exactly what diversification solves for investors.
When it comes to buying shares it is important you be prudent and take a more diversified approach. Perhaps the easiest way to do this is through an exchange-traded fund or ETF.
This will allow you to buy a basket of assets in one trade.
"ETFs can provide low-cost access to thousands of securities across a wide range of asset classes and exposure to entire markets in a single trade," Meakin told Finder.
"ETFs can help to mitigate risk in a balanced portfolio by offering a mix of defensive and growth potential stocks in a single fund."
He highlights that in current market conditions, an ETF approach could be even more valuable.
"They are more prominent than ever in today's volatile market, as investors look to park their funds in less risky products, whilst still having exposure to certain asset classes," Meakin said.
5. Australia has a second stock exchange
While you will mostly hear about the ASX 200 in the media, there's actually 2 exchanges in Australia.
The second one, known as Cboe Australia (formerly Chi-X) exchange – CXA – has over 20% market share of trade volume.
Not only is it Australia's second share market, but it's also likely to house the first Bitcoin ETF.
Unfortunately, Cboe Australia isn't available on all brokers, but some brokers – including GO Markets – provide support natively on their platforms.