Investing in shares | How to Buy and Invest | Info guide
Investing in Shares: How to invest in the share market
First things first, what is a share?
A share is a part of a company that can be bought and sold. That means that purchasing and owning shares makes you a partial owner in the company.
And, what’s the stock market?
The stock or share market is where shares of listed companies are purchased and sold. Share brokers place trades on behalf of their customers as buy or sell orders which are then matched up and settled by the exchange within two working days.
So, how do I get started in buying shares?
There are two main ways to invest in the stock market, directly and indirectly. To buy shares directly in listed companies you will need a broker. There are two main types of brokers, online or discount brokers and full-service brokers. Shares are purchased by placing orders with your broker, online or full service for a brokerage free. Online brokering services are usually offered by banks and will be cheaper than full service brokers.
For indirect methods of buying shares, there are a few options. Two of the most common options include investing in managed funds or ETFs (Exchange Traded Funds). Investing in either of these options means that you are investing in the stock market but not in direct control over your investments and stock choices. Managed funds and ETFs are managed by an investment team so it’s important to consider the management and whether their goals align with yours. Rather than owning the shares directly, by investing in managed funds and ETFs you will own units in the funds.
Other indirect methods include purchasing shares through employee share schemes and LICs (Listed Investment Companies).
How do I know what broker to choose?
To decide which broker you should choose, you should consider your financial position, investment horizon and experience and familiarity with investing in shares. If you have a large budget for investing in shares and are considering a large share portfolio it may be worth it to choose a full-service broker for addition support and more personalised advice. However, if you are just starting out and purchasing your first shares and do not have a large amount of money to invest, a budget online broker should meet your needs. If you are comfortable with your investing style and you prefer to DIY your investments and are happy with your own research and decisions, then an online discount broker could save you money compared with a full-service broker. On the other hand, some people who are just starting out prefer to have someone more experienced to talk to, which is where a full-service broker can be helpful. Choosing which broker is something you should consider from a variety or points and weighing up the pros and cons of both styles of service is a useful thing to do.
How do investors make money from investing in shares?
There are two main ways people can make money from shares. One is from capital gains from selling the shares after they have risen in price, and the other way is through receiving dividends.
What type of shares can you buy?
Shares come in two main types: ordinary and preference shares. Generally, an ordinary share entitles its owner to dividend payments and voting rights in the company’s AGM. Preference shareholders, however, do not usually have voting rights. Preference shareholders receive preference over dividend payments, and if the company was to enter bankruptcy, they would receive payment before ordinary shareholders.
Why do companies list on exchange?
Companies list on exchange to raise extra money to expand their operations. Funding for activities using equity is less risky than debt which is why companies choose to use equity to fund part of their operations. Listing allows the company to raise funds to grow their company larger.
What are some benefits of investing in shares?
Benefits of owning shares include:
- Potential income from dividends
- Potential capital gain (selling shares at a higher price than when you bought them)
- Long term investments (more than one year) incur lower tax rates
- Diversifying your asset base, which maximises return on your money whilst minimising risk
- Generally, provides higher rate of return than keeping your money in cash
- “Infinite” potential upside, limited downside
What are some risks of investing in shares?
- You could lose your entire investment if the share price falls to zero
- As a result of the order of capital structure, it is unlikely you’ll receive your money in the event of a company wind up as equity holders are the last in line to receive money
- Dividends are not fixed or mandatory
- More volatile than some other investments which makes them riskier than some other investments
- Some shares can be illiquid, and it can be difficult to get your money out quickly should you need to
What rights and responsibilities do you have when you buy shares?
As a shareholder of a company you are a partial owner. This means that you need to make decisions for the company on certain matters by voting. Generally, an ordinary share entitles its owner to voting rights in the company’s AGM. Shareholders have a right to influence management through voting in the board of directors. Shareholders have a right to receive any dividends the company declares and the right to buy new shares if the company releases new shares.
Why invest in the share market?
There are many reasons why people might want to invest in the share market. Some of these reasons include: inflation eating into cash savings, diversification purposes and for the return that can be achieved on shares if you are properly equipped.
Information for first time investors
Investors should be well informed about the risks of shares before they start investing.
Given that the first step of investing in shares is choosing a broker, investors should consider the kind of brokerage service they would like and can afford, a budget online service or a full-service broker.
Understanding buy and sell orders
To make trades on the share market brokers for buyers and sellers will list the price and quantity of shares they wish to trade. The share market matches these up and executes the trade. Depending on the quantity available you may need to trade part of your order at a different price to the other.