How to buy shares
Investing in shares can be a simple and affordable way to grow your wealth. Rather than buying property, which is expensive in Australia when compared to international standards, shares allow you to purchase a literal ‘share’ in a company, and have the management and employees of that company work to increase the value of the company, and in turn your shares.
There are of course risks when investing in shares, so you should be well acquainted with all of the potential pitfalls before investing in shares.
Buying shares online
Buying shares is easy and accessible thanks to online brokerage platforms. There are only a handful of steps involved when it comes to buying a share online, but the time you spend on each of these steps may differ depending on your investment strategy, risk appetite and brokerage platform.
1. Decide on a brokerage platform and set it up
This article covers buying shares online. You can also buy shares over the phone or face-to-face with a share broker. These are known as ‘full brokerage’ services.
Online share trading services are low-cost platforms which allow you to buy and sell shares online, and they usually offer little or no investment recommendations. Choices include platforms such as Commsec, Westpac, nabtrade, and FP Markets Stockbroking. These providers will generally charge a brokerage fee when you buy or sell shares.
Fees for buying and selling parcels of shares usually start around the $20 mark for each individual transaction. Most share trading platforms will charge a flat fee for each transaction, but as shown in the table below, the fees and features available will differ between providers.
Compare the features of a range of platforms before deciding which one offers the best overall package and service for your needs.
2. Research and decide on a market and a share
The most time-intensive aspect of buying shares will include your research and decision-making process. While it’s outside the scope of this article, you’ll want to justify your investment purchase with solid research, whether that be through analysing a company’s annual reports, reading investment reports, monitoring different market sectors or speaking to an expert such as a financial adviser or stockbroker.
3. Choose how many shares you’re going to buy
Once you’ve decided on a share you like, you’ll be required to enter in the number of shares you wish to purchase into your online broker platform. This process will be fairly similar from platform to platform and is quite straightforward. However, note that generally you can’t buy less than $500 worth of shares unless you already own shares in the same company.
It’s also worth pointing out that larger purchases may incur higher fees or involve different fee structures depending on the trade. For example, your platform may charge you $30 as a brokerage fee to buy a smaller number of shares, but will change the fee structure to 0.1% of the trade value when larger amounts are purchased.
4. Place your order - decide if you’re buying at market or setting a limit order
Once you’ve decided on the company and the number of shares you’re buying, you’ll have to decide whether you’re buying ‘at market’ or ‘at limit’. At market will see your order completed at the lowest amount listed on the share market.
At limit allows you to enter a maximum price you are willing to pay. If enough sellers are found at your limit price, your trade will go through; otherwise it will remain until there are enough sellers (the length of time your trade remains will depend on how long you’ve decided to allow it to stand, with most platforms allowing you to leave the trade for a day or until sellers are found).
5. Pay for your shares
Once you’ve made your trade, you’ll have to pay for it. Most trades are ‘T+3’, meaning you’re expected to pay for your purchase within three days. Your online broker will require you to have the funds for the purchase in your trading account, but if you’re using a full service broker you’ll generally have three days for the trade.
6. Monitor your shares
Now that you have invested in some shares, you’ll need to monitor their progress in regard to your investment plan. However, the frequency with which you monitor them will depend on your strategy. For example, if you have a long-term investment strategy, it may be a good idea to check in and see how your shares are performing every month. If you have a medium-term strategy, it may be a good idea to check each night or each week.
7. Sell your shares
When it comes time to sell your shares, you will repeat the same steps listed in point four. Once again, when selling shares you can choose whether you want to sell them at market prices or at limit. In this case, at limit refers to the minimum price you’re prepared to sell the shares for.
Tips when buying shares
- Do your homework. You’d always do plenty of research beforehand if you were investing money in property, so make sure to do the same if you’re planning on buying shares. Research the financial health and growth prospects of companies by poring over annual reports, keeping an eye out for company alerts, reading share prospectuses and accessing research reports for share brokers.
- Stay up to date with the economy. Keep an eye on the health of the Australian economy, Reserve Bank interest rate decisions, government policy changes, levels of investor confidence, exchange rates and the performance of share markets in Australia and overseas. All of these can influence when is and is not a good time for you to invest.
- Start with blue chip companies. The safest option for many investors who are starting out in the share market is to invest in blue chip companies. These are Australia’s top 50 companies, as listed on the S&P/ASX 50, and are typically well-established companies. They usually offer the best chance for minimising your risk and providing steady returns.
- What about speculative shares? Speculative companies are those that are not in the top 100 Australian companies and that have a shorter history doing business. Some investors are attracted to buying shares in these companies because they offer the potential for large returns, but you should also be warned that the potential to suffer large losses should be considered.
- Buy what you know. This is a common phrase in share trading circles and it is a very sage piece of advice. Rather than diving in at the deep end and investing in a company which operates in a field you have little or no understanding of, start with industries and businesses you have some sort of background knowledge or understanding of.
- Diversify. If you want to minimise your exposure to any risk, consider diversifying your portfolio across a range of different industries. If you buy shares across five or six industries instead of just one or two, you should be better protected against losses if one particularly industry experiences a sharp downturn.
Risks of investing in shares
- Financial losses. A company’s share prices can fall dramatically and even drop as far as zero. This can mean significant financial losses for investors. Before investing in shares, you need to be aware that there is a risk of you losing some or all of your money.
- Last in line. Shareholders are usually the last in line to be paid when a company goes broke. When this happens, there’s a definite chance that you won’t get your money back.
- Stress. The share market will fluctuate on a daily basis, but this can lead to plenty of stress for investors. If you can’t handle the ups and downs you may be better off looking for a safer and steadier investment option.
- Unexpected problems. Even if you do an enormous amount of thorough research into a particular company, it’s simply not possible to predict the future. Natural disasters, terrorist attacks, bad company news and even changes in government policy can all occur unexpectedly and adversely affect the price of shares.
- Lack of expertise. While investing in the share market sounds quite easy in theory, it can actually get quite complicated if you don’t know what you’re doing. First-time investors should be wary of getting ahead of themselves.
- Getting in over your head. A final word of warning if you’re thinking of investing in shares: don’t bite off more than you can chew. Of course, making sure to use your common sense and take a cautious approach is good advice no matter whether you’re planning on investing in shares, property or anything else.
Although investing in shares is not without its dangers and pitfalls, with a sound investment strategy and a sensible approach you can expand your portfolio and improve your financial health. And the first step to investing in shares is finding the right brokerage platform for your needs.
Frequently asked questions about buying shares online
What shares can I buy online?
This will depend on your brokerage platform. Some platforms will allow you to purchase a wide variety of exchange-listed shares and some will even allow you to purchase international shares. Research the different share trading platforms to see which stocks each provider allows you to buy and sell.
What is the minimum trade value?
As mentioned above, if you don’t already own stocks in a company, you’ll be required to purchase over $500 worth during your first trade. Once you own stocks, you can buy further stocks with no minimum.
What is the maximum value I can buy?
The maximum value of shares you can buy online will again depend on your brokerage platform. Some platforms will have no maximum amount but will require you to have the necessary funds for your purchase in your trading account.
How long will it take for my order to be processed?
The time it will take for your buy or sell order to go through will depend on whether you lodge your order at market or at limit. For example, if you’re buying shares at market value, the order will be placed as soon as possible and the shares purchased at the best price available at the time. If you place your order at limit, however, you can stipulate the maximum price you are willing to pay and how long you will wait for the right market conditions to arise. The limit order will then stay on the market until your designated expiry date and if it has not been executed by then, your order will be cancelled.
Can I change or cancel my order?
If you’re lodging a market order, your brokerage platform will most likely provide you with the opportunity to review and modify your order before submitting it. Once it has been submitted, however, it will be processed as soon as possible.
If you decide to place a limit order and it has not yet been executed, you will be able to amend or even cancel the transaction.
What happens once I purchase my shares?
Once you have purchased shares in a company, you literally own a small portion of that company. As the stock market fluctuates each day and the value of shares rises and falls, the value of your shares will similarly change. You’ll receive company reports and news updates so you can stay abreast of its performance and direction, while many companies will also pay out dividends (your share of the company’s profits or earnings) twice a year. It’s up to you to monitor the performance of your shares in line with your investment strategy and decide whether to sell, hold or buy more shares.