By Anthony Bell, Finance Expert
www.bellpartners.com
Given what we have seen over the last few years in share markets across the world, it is understandable that the average investor may be a bit more hesitant to start a share portfolio and enter the share market.
As with any type of market (residential property or the price of bananas at the fruit shop) the share market is driven by supply and demand, meaning if you can understand the drivers of these factors you will receive on average a higher return than that of any other asset class.
For those who are contemplating investing some of their hard earned savings into shares for the first time, the best place to start is to put your reading glasses on. Information is the key. Reading publications such as the Financial Review and The Australian Investor to gain a feel for how the market operates and reacts to certain events will be of benefit to any first time investor.
When people look to buy an investment property they are often told to purchase in areas they know well. The same can be said when investing in the share market. While the smaller stocks do have the potential to increase significantly in value, there can be a higher level of risk attached to these stocks. If a first time investor is looking to gain access to the smaller stocks listed on the ASX it may be wise to utilise the services of a fund manager who deals in small stocks every day. This allows you to focus on what you do best (i.e. earning an income from your occupation) and leave the investment to the fund manager.
Alternatively, you may like to invest at the bigger end of town or what are commonly referred to as Blue Chip stocks. Blue chip stocks are not usually expected to experience the volatility (although the GFC taught us even the big companies can go broke) and are widely seen as a safe investment long term. These shares usually pay a dividend (distribution of company profits to shareholders) bi-annually of between 2%-8% p.a. providing you a steady income on your investment.
The easiest and cheapest way to get started would be an online trading account that all major banks offer. The fees involved for a trade are generally between $15-$30 per trade up to a certain limit. These accounts are fairly easy to use and will not take very long for a beginner to master. If you are however looking to jump straight in with a large sum of money or want to trade on a frequent basis or in a sector you are not familiar with, a broker could be the way to go. It is the dearer of the two options at circa $100 per trade minimum but the peace of mind that comes with speaking to a person and having them execute your trades for you is worth the cost when your dealing with a large sum of money. They will also be able to provide you with recommendations on potential buying opportunities that they may come across.
Diversification is the key to minimising risk in any portfolio. The old catchcry “don’t put all your eggs in one basket” rings true in share market investment also. As there are transaction costs in purchasing shares it may be difficult for an investor to gain access to adequate diversification. For example, if you were employing the services of a stock broker charging $100 per trade, brokerage on a $20,000 investment across ten stocks would cost you 1% of funds invested once you take into account the costs of selling. There is an emerging trend in the Australian Stock market for Exchange Traded Funds (ETFs) which are investment products that allow investors to buy or sell shares of entire portfolios of stock in a single security. The savings for investors can be quite significant in the long run as you will only hold a single Exchange Traded Fund which will provide you with exposure to a number of stocks on the Australian Stock Exchange as opposed to buying and selling multiple direct shares. This option may be something for first time investors to consider.
People invest in shares to make money, however when you do realise a gain on a stock the tax man will want his cut. Profit made from shares you sell in the financial year will be taxed at your marginal tax rate. An incentive to invest long term is that if you hold a stock for longer than 12 months you will receive a 50% discount on the tax that you would have to pay. If you realise a loss on a stock in a financial year, the losses can be offset against profits you may make on other stocks meaning you will only be taxed on your overall gain for the financial year.
In summary, if you are interested in investing in shares you need to start reading and gaining knowledge before you invest. Putting money in something you don’t know about is like handing your savings over to a black jack dealer so putting the effort will ensure you have a better chance of reaping the rewards.
