Now that you know Dale’s golden rules of investing and how to budget, the next step to financial independence is learning how to trade shares. Dale helps you to get started….
It seems that more women are now choosing to gain extra balance in their lives by learning how to trade shares. Some are doing it to supplement their income, whilst others want to spend more time with their families rather than at work. Whatever your reason, in this article I’d like to show you how to get started on your very own share portfolio while building on the Golden Rules of investing that I revealed in an earlier article.
Remember the three Golden Rules to successfully investing in the share market are a simple set of portfolio management principles that will guide you safely on your investment journey.
Let’s get started
Before I share with you how to go about selecting shares for your very own share portfolio, there are four areas I have laid out below which you need to consider:
1. Gain the knowledge
Over the many years I have been teaching people how to successfully invest, I have heard all sorts of stories about mistakes made in the market. Knowing the 3 Golden Rules would have saved many investors a lot of money, which is why ignorance can be expensive. Without the right knowledge, people tend to get drawn into the emotions of the market, leading to reactive rather than logical decisions.
I developed the Diploma in Share Trading and Investment to assist people in gaining the right knowledge, however, there are many share market courses presented by fly-by-nighters, so be careful and do your research before handing over your hard earned cash in the hope of making money from the market.
2. Selecting a broker
A stockbroker will assist you to buy and sell shares in a similar way as a real estate agent does when you buy or sell a house.
Broadly speaking, there are two types of brokers—a full service broker and a discount broker. Full service brokers charge higher brokerage fees and deliver a much more personal service, expertise and advice. Discount or online brokers are cheaper and deliver an execution only service, meaning their service is limited to only buying and selling for you. To assist you to select a broker, visit the Find a Broker Service on the ASX website at www.asx.com.au.
3. Setting up an account with a broker
You will be required to open an account with your stockbroker before you begin, and he will require you to provide a bank account to facilitate the transfer of funds whenever you buy or sell.
When you establish an account, your broker will also sponsor you on the CHESS system or Clearing House Electronic Sub-register System, which is operated by a subsidiary of the ASX (Australian Stock Exchange) on behalf of listed companies. The CHESS system keeps track of the shares you buy and sell, simplifying your administration by consolidating all holdings into a single account. This is sort of like a bank account for shares.
4. How much will you invest?
The amount you have to invest will determine how you initially construct your portfolio. I have included three investor scenarios which will assist you in making decisions.
Investors with a small amount of capital
Because of transaction costs, I always recommend that the minimum amount you should allocate to a particular stock is $1,000. Obviously, if you have less than $5,000 to invest, you will be breaking Golden Rule 3 of not investing more than 20% in any one share, until your portfolio grows large enough. It is okay to break this rule in the short term as for many it is the only way they can get started.
Once you hold a minimum of 5 shares, you can begin to increase the amount you hold in each company and then eventually increase the number of shares you hold.
Small to medium investors
If you have $10,000 to $20,000 to invest, you could comfortably invest no more than 20 per cent of your total capital in each share. In other words, you would simply buy 5 different shares to hold in your portfolio until you build up capital to buy more.
Larger investors
If you are a large investor with capital holdings over $20,000, you would purchase more than 5 shares. If you have $100,000 or more to invest, you may decide to purchase 10 shares, with each stock representing 10 per cent of your total portfolio.
Regardless of which category you fit into, you want to work towards holding between 8 and 12 stocks in your portfolio as stated in Golden Rule 2.
Dale Gillham is the director and founder of Wealth Within, an Australian-based company specialising in share market education and independent investment advice.
Dale is the author of the book ‘How to Beat the Managed Funds by 20% and Australia’s first and only accredited Diploma of Share Trading and Investment. For information visit www.wealthwithin.com.au