Terms like financial market, securities, fractional shares, and dividends may sound completely incomprehensible to novice investors. In reality, operating within a financial market is not as sophisticated as it may seem. Whether you are looking for additional income or merely want to get the most out of your savings, investing in shares is a good idea.
There are two reasons for this. First of all, you won’t need huge sums of money to get started. Secondly, you don’t have to know that much. Brokers and Robo advisors will eagerly help you.
Read on to find out how to profit from dealing with shares in the Australian Share Market and the minimum share purchase, and learn about some basic investment tips for beginners.
How to Profit from Buying Shares
Before going into the details of investing in shares, let’s take a closer look at how you can gain a profit. Essentially, there are two methods:
Buying shares of a particular company means that you become an owner of that company. Your ownership depends on the amount (percentage) of shares you own in terms of the whole offer. For example, if your purchase accounts for 5% of the available shares, you own 5% of the company. The organization will pay you dividends (your income from operations as an investor).
Capital return is the most widely used method of gaining profit from shares. The principle is easy: you purchase shares and resell them when the company’s value has increased on the stock market. The difference between the purchasing and selling price dictates how much profit you make.
However, you may lose money if the company’s value on the market drops. Therefore, investors need to constantly track a company’s valuation so as not to lose their invested funds.
Where and How to Buy Shares
There several ways to buy shares:
- Directly from a company – This is opportunity typically becomes available if an organization offers shares to the market. This is called an initial public offering (IPO) or a float. To purchase, an investor needs to send a cheque and relevant documents. However, there is no guarantee that you will get the desired percentage of shares, or any at all.
- From a fund – If you deal with an investment fund, you don’t purchase shares from a particular company. Usually, you invest your money in the fund: financial specialists then combine it with other investors’ funds and purchase bigger chunks of asset funds. Normally, you receive a set profit dependent on the actual income of the fund.
- On the market – this is the most popular option, and we will focus on it from now on. Australians typically operate on the Australian Stock Exchange (ASX), but this isn’t always the case. To place an order, you need to either become a member of the exchange (open an account) or to find a broker who operates on your behalf and receive a fee for the broker’s service. Normally, brokers also provide advisory services.
An important aspect to understand is the difference between types of orders. Once you have decided to buy shares, you have to place an order. A market order, for instance, is a quick type of order, which is placed at a specific time to help you receive the best price.
The drawback is that the price can change between the moment you place it and the actual execution of the order. A limit order can only be used when the price has reached the desired amount or dropped even lower. Otherwise, the trade won’t be carried out.
The Minimum Investment to Purchase Shares in Australia
The Minimum amount to invest in shares isn’t always down to personal preferences. Firstly, you have to consider what is called “a minimum marketable parcel of shares”. This adds up to $500 worth in shares. Basically, this is the minimum the market requires you to start with.
The expenditures aren’t just limited to the share price. To operate on the market, you need to have a brokerage account. Usually, investors find competent financial professionals known as brokers, who do the majority of the job for them.
Along with operating on an investor’s behalf, they provide advisory services on building a proper investment portfolio. Brokers can also set limits for minimum investment, which are usually far higher than $500. They can even reach $100,000.
Brokerage fees vary from professional to professional. Online brokers offer the most affordable service; they can charge as low as $10 per trade. The low-price covers advice and recommendations. Online brokers generally only execute trades.
Full-service specialists are deeply involved with managing clients’ wishes and funds; therefore, they are a better yet more expensive option. Their prices can be up to $80 per trade minimum.
Successful Investment Strategy
Once you’ve decided to purchase your shares, it’s vital to ensure profitability. For this, you have to calculate all the costs and work out the appropriate sum and shares to buy. It’s obvious that you should invest in a reliable company, preferably with a steadily increasing market valuation. The size of the investment deserves special attention.
The point here is that the bigger the sum, the lower the accompanying costs are. Let’s look at a simple example:
- Imagine that you have invested $100 in shares with a brokerage fee of $10.
- The share has increased by 20%, and you sell them at $120.
- When selling, you also pay a brokerage fee of $10. Thus, you haven’t gained anything as your costs ($10 + $10) were equal to your gain ($120 – $100 = $20).
Imagine that you invested $500 under the same circumstances. In such a case, with an increase of 20%, your gain would be $600 – $500 – $20 = $80.
Although higher investments entail a higher income, they are accompanied by increased risks. To secure a stable financial situation and assets, it’s advisable that you adhere to two principles:
- Diversify your portfolio. Don’t invest big sums in a single company’s shares. If, for example, you have $1,000 -2,000, purchasing ownership of one organization is ok. When the sum is $10,000 or more, it’s better to consider other assets.
- Set a limit for investment and don’t exceed it. The desire to gain more means that it’s tempting to invest more than you can afford. However, it’s vital to remember that 2,3, or even 5 years may pass before you can get your money back.
Investing in shares isn’t that complicated, yet requires a well thought-out approach. There are many options to consider, both in terms of profitability and the skills and knowledge needed to invest in shares. Those who have a good understanding of the market can turn to online brokers for a small fee, while others – who seek professional aid – have to pay more for competent service. Keep in mind: you aren’t obliged to invest thousands. You can start with the minimum share purchase ASX requires – $500.