Buying shares doesn't require huge amounts of money, writes Penny Pryor.
IF YOU have never bought a share, the sharemarket can seem like a minefield. And if you have only a little bit of cash, it can appear even scarier.
Many younger investors and those in the Generation Y age bracket stay out of equities, preferring discretionary spending, and don't realise wealth can be built from small amounts.
But the most important thing you can do is "just do it". Buying shares in small parcels will help you understand how markets work and what you should be doing when it comes to investing.
Bell Direct is an online trading platform. Its chief executive, Arnie Selvarajah, advises Gen Y and first-time investors: "The best thing you can do is get started you will learn along the way."
He recites an old Bankers Trust slogan along the lines of "You don't have to be wealthy to be an investor but you have to be an investor to be wealthy" as one of the most important messages for new share traders.
If you have limited money to invest, you will need to minimise your broking costs. The cost of trading on some platforms varies and even if fees per trade are low, you might need to hold a certain amount with an online broker to trade with them. The table below outlines some of the cheaper options.
"For smaller investors, transaction costs are very important, as that's going to eat into capital quite quickly," says Michael McCarthy, the chief market strategist at CMC Markets, which offers an online broking platform.
Selvarajah agrees and warns against paying a lot for brokerage. An online broker is therefore probably a better option than a full-service broker for the first-time investor.
When picking shares, do your research and don't rely on word of mouth. Research always wins in the medium to longer term.
"Tips are great but you've got to get the timing right," Selvarajah says. "Generally, by the time you've heard the tip, it's too late."
You should learn how to read a balance sheet and some basic stock metrics, such as:
Market capitalisation - this measures the size of a company and is the total number of shares on offer multiplied by their price
Earnings per share - a measure of a company's profitability and is calculated by dividing total company earnings by the number of shares on offer and
Price-earnings ratio - a company's market price divided by earnings per share. If a company's P/E is 30, future earnings expectations are high and investors are willing to pay $30 per $1 of current earnings.
Investing is full of cliches. And here's another one: don't put all your eggs in one basket. If your funds are limited, you shouldn't use them all to buy just one share.
The minimum parcel size for trading shares on the Australian Securities Exchange is $500. So, if you have $2000, that will give you four parcels of shares. That is probably fair diversification for a portfolio of that size, Selvarajah says.
"Think about diversifying those stocks -think about the different industries that are interesting to you and try and pick the winner in those industries," he says.
If you focus on the industries you know, you will understand different economic impacts on the companies in which you are investing.
"If you're interested in retail and you walk into a Woolworths and you walk into Coles, you can quickly tell which one is going to be successful," Selvarajah says.
McCarthy points out that the materials and finance sectors comprise two-thirds of the Australian sharemarket.
"So, you could buy three companies and have a fairly close to indexed portfolio ... in very broad terms," he says.
McCarthy says another way to diversify is to buy a share like Wesfarmers, which has operations in many different industries.
"You're getting a diversified exposure with one stock," he says.
An exchange-traded fund (ETF) is another option. A unit in an ETF comprises a little bit of every stock in the ASX/S&P 200, for a very reasonable price. You can buy ETFs across different global markets and sectors.
If your money is limited but you plan to add to it through a savings plan, you should consider dollar-cost averaging to build your portfolio.
This involves buying your chosen equity over time in smaller parcel sizes. Instead of buying $1000 of BHP shares at once, you might plan to split the purchase over six months. If the price rises, your average price during that period will be lower. In other words, you are better off than if you bought $1000 in shares at the beginning.
This is a smart way to build your portfolio, but you have to monitor your investments as you go.
"One thing that has changed since the GFC is that it is important to be actively monitoring your portfolio," Selvarajah says.
"It's about being engaged in the market and engaged with your portfolio so you can continually assess whether you do need to switch stocks out."
Girlfriend says 'dive in' for dividends
RICHARD WALKER is just starting out in the sharemarket.
At 34, he is slightly older than the Generation Y age bracket but he faces the same issues when investing in stocks.
He has $5000 and is concerned that putting it all in the sharemarket might risk his and his partner's savings.
"At the moment, I think I'm just looking for opportunities that come up," he says.
Richard works as an accounts clerk for a coalmining company and is fortunate enough to have his employer pay his fees for a diploma in financial services.
He wanted to study to improve his understanding of the sharemarket. His first and only, so far purchase has been a $1000 parcel in Mortgage Choice.
"I look at the share price, dividends and what percentage that is [of the share price] and how much debt they've got," he says.
With limited funds, diversification is obviously an issue and he plans to buy $1000 parcels.
"Everyone says to buy BHP, Rio, the banks and suchlike but the prices per share are so high," Richard says. "If you've only got a small amount to invest ... how to diversify [is an issue]."
But while hesitant, he knows that investing is all about just getting on with it and he plans to take his girlfriend's advice and "just dive in".