If you’re looking to build a secure future for yourself and your family, investing in shares could help you generate wealth and achieve your financial goals. But if you’re new to investing, it’s hard to know where to start.
So let’s take a look at the basics of buying and selling shares in our guide to share trading for dummies.
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Updated February 25th, 2020
Share trading basics
The sharemarket is a place where investors can buy and sell “shares” in public companies. Also known as stock exchanges, share markets exist in countries all over the world – in Australia our national exchange is the Australian Securities Exchange (ASX), while other famous international stock exchanges include the New York Stock Exchange and the London Stock Exchange.
A share is basically an ownership portion of a company. When you buy shares you become a shareholder, meaning you own a percentage of a company and get to have a say in how it is run. The value of your shares is influenced by a wide range of issues, including the company’s performance and earnings, supply and demand, and broader economic factors.
Once you own shares you can also sell them to other investors. In the past, share trading was done physically at a stock exchange – you’ve probably seen old news footage of chaotic scenes of traders yelling out complex orders to buy and sell shares.
Today, investors can buy and sell shares via online share trading platforms. Many major Australian banks offer share trading platforms, including the Big Four, while other share trading platforms are offered by specialist brokerage firms.
How can I make money trading shares?
There are two main ways to make money selling shares:
- Capital growth. This occurs when you sell shares for a higher price than what you paid for them. For example, you may have purchased 100 shares in Company A two years ago, with each individual share valued at $5 meaning an initial investment of $500. In the ensuing period, the value of one share in the company has risen to $9, so your total parcel of shares is now worth $900. It can be sold for a profit of $400.
- Dividends. Many public companies pay dividends to their investors. A dividend is basically a shareholder’s portion of the company’s profits – for example, a company may offer a dividend of 50 cents per share to its shareholders, so you would receive a total dividend payment of 50 cents multiplied by the number of shares you own. Not all companies pay dividends, but those that do typically pay them twice a year. By choosing shares with a long history of providing dividends to investors, you can use your share portfolio to provide an ongoing source of income.
Back to topWhat are the benefits of share trading?
Share trading provides many benefits to investors, including:
- Shares typically grow in capital. Buying shares allows you to benefit from the growth in value of an asset over time. If you hold the shares for more than 12 months you can also take advantage of a 50% capital gains tax (CGT) discount.
- If chosen correctly, it can generate income. Shares in companies that pay dividends can be used to provide an ongoing source of income.
- There are tax benefits if you fall into the highest income tax bracket. If a company has already paid tax on its profits, the dividends it pays come with franking credits attached. These credits can be used to offset the amount of tax you pay on your other income.
- Rights issues. Some companies make rights issues, which basically allow shareholders to purchase more shares in the same company at a discounted rate and usually without paying any brokerage fees.
- Ownership benefits. Owning shares means you get to have a say in how a company is run, including voting on board resolutions and attending annual general meetings (AGMs).
- Shareholder discounts. Some companies also offer discounts to shareholders when they purchase goods or services from the company or its subsidiaries.
What are the risks associated with share trading?
Just like any other form of investment, shares come with a range of risks attached, including:
- Shares are volatile and are considered risky. Share prices can rise and fall quickly – prices in a company can even fall to zero and you could lose the money you invest.
- Shares don't always pay dividends. Dividend amounts are not constant. They will fluctuate in line with the company’s profits.
- Shares tend to decline in value during bad economic times. Some shares, for example mining shares, tend to be cyclical – investing at the wrong time of the cycle can be costly.
- Last in line if corporation liquidates. If a company goes broke, its shareholders are the last of its creditors to get their money back.
How do I choose which shares to buy?
Despite what some people and investment “experts” might tell you, there is no guaranteed method for choosing the right shares. Some shares offer a high risk/high reward approach: while they have the potential to increase in value quickly, they also have the potential to quickly drop in value. Other shares tend to be steadier performers and have a history of delivering solid profits and paying dividends to shareholders.
There are income shares, blue-chip shares in large companies, cyclical shares that rise and fall with economic trends, and even defensive shares that often maintain their value when the rest of the economy takes a dive.
The right shares for you will depend on your financial goals, your investment timeframe and your appetite for risk. Once you know exactly what you want to achieve with your share trading, you can start researching different companies and the benefits they will bring to your portfolio.
Back to topAll sounds great, how do I get started?
If you want to start trading shares, there are a few simple things you need to do:
- Compare and choose share trading platforms. Check out our reviews of online share trading platforms.
- Sign up for an account. You will need to provide your name, contact details, proof of ID and bank account information.
- Choose the shares you want to buy. Research the performance, earnings and future potential of a range of companies. It’s also important to consider your overall investment strategy and appetite for risk before choosing any shares.
- Place a buy order. Your share trading platform provider should offer guides and advice on how to do this. The minimum amount of shares you can buy is $500, while your share trading platform will also charge a brokerage fee (typically around $15-$20) for placing the trade.
Share trading can help you generate wealth and reach your financial goals. Just make sure you’re fully aware of all the risks involved before you place your first trade.
