For most of us making our first investment in the stock market can be quite a daunting proposition, especially if you’re unfamiliar with the markets in’s and out’s.
I don’t think making an investment in the market should be so hard and here’s why.
Step 1: Make an Investing Wish list
The first thing to consider is if you’re a passive or active investor. A passive investor chooses to have a buy and hold portfolio for the long term. Passive investors typically have minimal interest in or time for analysing individual businesses. Instead, they would much rather invest in an exchange traded fund (ETF) that tracks an index fund such as the S&P 500.
By contrast, an active investor makes the time and effort to actively manage their investments. Active investors understand that buying businesses within their circle of competence is key to a successful investment. To invest within your circle of competence, it’s vital to only consider businesses that you’re capable of understanding and have an interest in.
Check out our Passive vs Active Investing blog for further analysis of the two investing styles.
Invest In What You Understand
Investing in businesses you understand makes your life a whole lot less stressful. As we all know, the stock market is prone to fluctuate quite regularly. Investing in businesses that have meaning to you means the ups and downs of your investment portfolio will have minimal impact on your daily life. Why? Because you have confidence in and thoroughly understand the businesses you’re invested in.
To find businesses within your circle of competence start by asking yourself two simple questions.
- What do I spend my money on? and
- What do I do in my spare time?
For instance, if you spend stacks of time and money in Supermarkets, businesses like Coles Group (COL) might interest you. Or if you love getting your hands on the latest tech, JB Hi-Fi (JBH) might be worth looking into.
Once you have answers to these questions, I’m confident you should be able to start formulating a shortlist of 3-5 listed businesses that you can confidently understand and analyse even further. Keep in mind that buying the right businesses at the wrong price can be a catalyst for huge losses.
A good place to start looking for a business that might appeal to you is Yahoo Finance. Yahoo Finance categorizes different businesses into their particular industry so you can filter through with ease.
Step 2: Finding An Investment Broker
Now to the easy part. Picking a Stock Broker. A Brokers core role is to act as an intermediary between buyers and sellers. It’s important to understand when you’re purchasing a stock, you’re purchasing that stock from a seller. That seller has decided to sell their stock at a price you’re willing to buy it and vise versa. It’s your broker’s job to facilitate this transaction and for their efforts, we pay them a small fee.
Investing in businesses listed on the ASX (Australian Securities Exchange) is quite straightforward if you know where to look. Currently, all of Australia’s Big 4 Banks have an online brokerage platform with analyst insights and company analysis tools/information. Online brokerage is certainly the cheapest and most popular option for everyday investors with brokerage being $10-$20 per trade. Keep in mind that brokerage fees will increase depending on the size of your investment. Setting up a trading account with the institution you’re already banking with is often the easiest way to get started and it means all of your capital is in one place.
Check out the links below for further information on Big 4 Banks trading platforms.
If you’re looking for something extra, a Full Service Broker will provide you with additional advice and support. Typically an FSB can provide investment options and potentially invest on your behalf. With brokerage starting at around $80 per trade, an FSB is more suited to investors with larger amounts of capital.
It’s important to note that the more you trade, the more brokerage fees your broker takes from your pocket. Stock Brokers are salespeople who work on commission. This means their investment advice may not always be in your best interest. Take their advice with a grain of salt and always form your own opinion before making an investment.
Step 3: Making Your Investment
So once you’ve set up your trading account, you’re ready to make your first investment. $500 is the smallest amount you can use to invest assuming you’re using an online broker. Keep in mind that a full-service broker should take to through the following steps before making an investment on your behalf.
Start by logging into your trading account and searching for the quote/symbol of the stock you want to invest in. For example, Coles Ltd code is COL. Once you find the business you’re looking for, you’ll see the current price buyers are offering to pay for one share, this is called the bid. It will also let you know what price sellers are offering and what the last price the stock was actually purchased at, these are called the ask and last respectively. A good online broker will do their best to get you a price closer the bid when placing a buy order and closer to the ask when placing a sell order. On the flip side, a not so good broker will get you a price closer to the ask (high price) when purchasing stock and sell for you at the bid (low price).
From here you’ll need to select buy. Once you have selected buy, you’ll be asked to choose the number of shares you want to purchase and at what price. For example, if you want to invest $10,000 into JB HI-Fi which has a last price of $39.23 (at the time of writing simply) divide $10,000 into $30.09 and you’ll end up at 332.3 shares.
Now that you know how many shares you’d like, you need to determine if you’re going to set a limit order or a market order.
A limit order is the maximum price you’d be willing to pay per share for a business. Using JB HI-FI again, let’s say the maximum you want to pay per share is $39.50. If you employ a limit order at $39.50, your broker will do their best to fulfill your order at or below that price. Never over. If nobody is willing to sell their stock at the price you set, your limit order will remain with the broker until the price falls. The beauty of limit orders is that you’re able to specify exactly how much you’d be willing to pay for a business. Unfortunately, it could take a while to get there depending on how low you set it.
When placing a market order your broker will simply get you a price as close as possible to the last price. This process usually happens in seconds. A market order is fantastic because it won’t leave you waiting for days or weeks for your order to execute. Keep in mind that you may pay a little more per share if the price is moving up, or a little less if the price per share is moving down.
Knowing how to buy shares is by no means a green light to invest in the first stock you see. The work required to build a successful investment portfolio demands due-diligence and patience, anyone who tells you otherwise is probably ill-informed. So with that said, get researching!
P.S. I’d love to meet you on Twitter: here.
Disclaimer: This website (the “The Money Pal”) is published and provided for informational and entertainment purposes only. The information in the Blog constitutes the Content Creator’s own opinions and it should not be regarded as financial advice.