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What is share market trading and how does it work?
If you're looking to get into the share market, here's how it works.
Investing in the share market can be a great way to make your money work harder for you, but it is important to understand how it works and the risks involved when investing.
When you trade shares, you’re buying and selling a portion of a company with other traders. These trades occur over a digital marketplace known as the stock market or stock exchange. In Australia, we have the Australian Securities Exchange (ASX), and in the United States, there’s the New York Stock Exchange (NYSE) and the Nasdaq.
Learn more about share market trading in this guide.
What is stock trading?
When you trade stocks, you're essentially buying and selling the underlying asset of a company with the goal of making a profit.
Each share has a price and it is determined by the supply and demand of the company's shares in the market, based on its present or predicted future performance.
Shares will usually follow a company's performance. While it's slightly more complex than this, over the long-term, earnings growth from the businesses you own usually results in share price growth. Conversely, if a company is underperforming and failing to deliver good profits, shareholders may decide to sell their shares.
What is the stock market?
Also called a stock exchange, a stock market is where investors trade shares in companies. Australia is home to a number of exchanges. Stocks in the biggest companies in Australia are traded on the Australian Securities Exchange (ASX); however, there are 2 smaller exchanges known as the Cboe (formally Chi-X) and the National Stock Exchange of Australia (NSX).
Some of the biggest overseas exchanges include the London Stock Exchange, the Nasdaq, the New York Stock Exchange (NYSE), the Japan Exchange Group and the Shanghai Stock Exchange. These can be accessed from Australia by using an international stock broker.
Finder survey: What do people use to invest in the stock market?
| Response | Male | Female |
|---|---|---|
| An online broker or share trading platform | 33.02% | 17.08% |
| Micro-investment app | 3.71% | 1.16% |
| Managed fund | 3.15% | 1.16% |
| Full-service stock broker | 2.23% | 1.33% |
| Other | 0.74% | 1.66% |
| Robo-advisor | 0.93% | 0.83% |
Source: Finder survey by Pure Profile of 1145 Australians, December 2023
Stock market explained
The stock market is a place where businesses come to raise money to fund their operations in the form of shares. The equity they sell is known as shares.
In exchange for selling stocks to the public, companies will need to disclose their financial position, usually quarterly or half yearly, and give the market up-to-date information. All of this information will impact the price of a share.
How are prices initially set?
A company's share price at the time of an IPO is usually determined by the company valuation, divided by the total number of shares listed. There are usually a few additional factors, including comparable companies, the business's track record and growth prospects.
What changes a stock price?
The stock market is basically an example of supply and demand.
After all, the entire thing is effectively a giant auction. For every stock market transaction, there must be a buyer and a seller. This means it is largely based on supply and demand.
The more desirable a stock, the more it'll increase. This is because there's only a limited supply and investors are less likely to sell a performing stock. If a stock is desired, it'll be in low supply. A lot of demand means the price will increase.
If a company is less valued by investors, sellers will look to get out, pushing up the amount of supply of the stock. Low demand means the price will fall.
How does online share trading work?
Although there are physical stock exchanges, shares are purchased and sold online.
To trade shares, you need a stock broker to act as an intermediary to the stock exchange.
A broker can be a full-service broker or an online broker. As well as placing trades on your behalf, a full-service broker can give you advice about which shares to trade. An online broker is an online software platform that lets you execute trades yourself.
Online brokers are a low-cost option compared to full-service brokers. If you don’t want to use a full-service broker, you can use share trading software to help you learn about which shares to trade and an online share trading platform to make trades.
How can you make a profit from share trading?
There are 3 ways to make money from share trading: capital growth, dividends and tax concessions.
Capital growth
This is the most common way to make money from share trading. This is simply where you sell shares for more than you paid and get a profit.
Dividends
This is when the directors of a company choose to pay company profits to shareholders. Dividend payments are based on the number of shares you own. These types of shares are called income shares. Not all companies pay dividends, and directors can reinvest profits to grow the company rather than pay a dividend.
Tax benefits
A share can be fully franked. This is a term to describe when a company has already paid tax on your dividends. You can use franking credits to reduce the tax you pay on other income.
What are the different types of shares?
You can trade these types of investments using online share trading platforms or through a broker.
Australian securities
This type of stock is publicly listed on the Australian Securities Exchange (ASX) or the National Stock Exchange of Australia (NSX). Shares in the top 200 Australian companies are traded on the S&P ASX 200.
International securities
You can also trade on overseas markets. You can trade shares in some of the biggest companies in the world from Europe, Asia, the US and London.
Managed funds
Managed funds and exchange traded funds (funds that are listed on a stock exchange) are investment tools you can use to access multiple assets, including shares, property, commodities and derivatives.
What are the benefits of share trading?
Share trading can make you money in the short term and the long term, plus they present tax benefits for investors.
- Liquidity. Shares are a liquid investment. You get your money 2 days after you make a trade.
- Capital growth. Shares have proven to be a solid investment for long-term capital growth.
- Tax. You may be eligible to receive a discount on any capital gains tax if you’ve held the shares for more than 12 months.
- Shareholder rights. When you become a shareholder, you can vote on company decisions and attend annual general meetings (AGMs).
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What are the risks of share trading?
Share trading is a way to make money. Generally speaking, the greater the potential gains, the greater the risk – share prices can rise and fall quickly.
- Volatility risk. Shares can be a volatile asset. The price can rise and fall quickly depending on a number of things such as good or bad company performance, company announcements and market performance.
- Timing risk. The share market moves in cycles. Buying shares in a bull market is no guarantee of future performance.
- Government risk. Laws can change and this can impact your share price and investment strategy.
- Overseas risk. Investing in international shares exposes you to risk from currency fluctuations and foreign governments.
Share trading jargon lookup
- Blue chip. Companies that have a proven record of growth, for example Commonwealth Bank, BHP Group and Telstra are blue-chip shares.
- IPO. An initial public offering is when a company floats on the stock exchange and sells shares to the public for the first time.
- Income shares. Companies that pay a dividend to shareholders.
- Growth shares. Companies that reinvest profits for long-term growth.
- Capital growth. When an asset increases in value over time.
- Rights issues. When a company makes shares available to existing shareholders at a discounted rate. Existing shareholders are not obligated to purchase shares under a rights issue and can sell the right to purchase discounted shares.
- Settlement date. The date when the person who has purchased shares must make a payment.
- Sectors. A sector is a group of similar companies. For example, the resources sector is made up of mining and commodities shares.
- Bull market. When the entire stock market is growing.
- Bear market. When the value of the stock market is falling.
- Day trading. A share-trading strategy where shares are purchased and sold on the same day for short-term capital gains.
- Market capitalisation. The number of shares a company has issued multiplied by the price. This is a way of calculating the size of a publicly-listed company.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
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Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
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