When you purchase shares, you essentially become a business owner. You are purchasing a share in a company which will usually be listed on a stock exchange. This share of ownership entitles you to a percentage of the company’s future profits, which you will receive as a dividend. You can also profit if the company performs well and the price of your share in the company increases.
This is an exciting prospect but knowing how and where to start can be daunting. Which company do you choose? How much should you invest? Should you spread your investment by buying smaller amounts of shares in a few different companies or invest all your money in one company? What is the best way to purchase the shares? How do you keep track of them? How or when should you sell them?
Below are 5 basic tips to starting a share portfolio.
Set out your goals.
Decide how much you are willing to invest and how long you can afford to keep this money invested. Ideally, buying shares should be a long-term investment. Once you have set your goals and formulated your portfolio plan, it is important to stay focused on the end goal.
- Decide your appetite for risk.
The stock market, and individual shares, can experience both large and small fluctuations in value. Understanding the amount of risk you are prepared to take – or how much uncertainty you are comfortable with if your share portfolio starts fluctuating in value – is an important part of investing.
- Plan your portfolio.
A diversified portfolio can temper the risk. This means spreading your shares by investing across a range of industries, markets and/or companies rather than putting all your eggs in one basket. You may opt to align your choices with your personal values by choosing companies who are focused on ethical and sustainable products or services.
- Decide on a platform or share trading service.
There are a range of options available, from DIY online trading platforms to professional advisors like stockbrokers or financial advisors. Decide how much of the work you want to do yourself and research the various fees and functionality for each option to make sure you are comfortable with what you are paying for.
- Do your research and don’t be afraid to ask for advice.
Educate yourself or ask for help from a financial advisor. Share investing shouldn’t be a punt.
Setting your goals for your share investment
If you are considering investing in shares, it is important to ensure that the money you invest is not part of your emergency fund or will not leave you short in paying your household bills or other financial commitments. Investing in shares should be a long-term commitment and means that this money is tied up for at least 5 years. Of course, you can sell your shares any time you like, but thinking short term will most likely lead to losses. It is a volatile market and share prices are influenced by a vast number of factors.
Things to think about when setting your goals:
- What’s the purpose of the investment? Is it for general wealth accumulation or perhaps to buy something in the future, like a family home?
- How much should you invest at the start and how much can you add to the portfolio going forward? You will need to look at your overall financial position including your cashflow and any planned expenses in the future.
- Do you have a target portfolio value after a certain number of years? Setting targets will help you stay focused on building your portfolio and encourage you to track your progress.
Assessing your appetite for risk
Everyone is different when it comes to how much they are willing to risk when it comes to money. There are two aspects to consider – what is your ‘risk capacity’ (what can you afford to lose and how will that impact your financial goals?) and how much ‘tolerance’ you have to take on risk (will you be able to sleep at night if your share portfolio suddenly drops by 20%?). For some people, there is a risk that they won’t meet their financial goals by being too conservative with how they invest their money, so it is important to speak to a professional advisor who can help you understand the right level of risk for your personal situation.
Planning your share portfolio
Once you have established your goals and risk tolerance, it is time to decide how and where you want to invest in your share portfolio. Generally, as with many investments, it is wise not to put all your eggs into one basket. A well-diversified portfolio will help lower the risk and spread the opportunity for growth.
You may start with shares in the company you work for (this may even be offered as part of your employment contract). Or perhaps purchasing shares in a company considered as ‘blue chip’, for example Telstra or one of the big four banks such as ANZ, NAB, Commonwealth or Westpac. You could align your share investing with your personal values and ethical leanings.
Platforms and Brokerage Accounts
Before you start investing, you will need a platform or account from which to conduct share trades. This account will help facilitate the share purchase or sale transaction.
As you may come across in your research, there are several options, and it is important to find the one that suits your individual needs. Five factors to consider when making the selection is as follows:
1. Security and transparency of the platform
2. Data access and live pricing
3. User experience (on your phone etc, easy to use etc).
4. Brokage fees
5. Access to international markets
With so many share trading platforms available in Australia, it is not easy to work out which one is best suited to you. Finder.com.au~1 and MOZO~2 provide useful comparisons and ratings for each of the platforms, and as identified by these ratings it really does depend on the stage of investing you are at and what your priorities are.
Do your research and don’t be afraid to ask for advice
If you are just starting out and not quite ready to commit with real money, you may consider paper trading. You can set up a ‘dummy’ trading account where you invest fake money. For example, Strawman allows you do this online and tracks your investments for you. This is a great idea for beginners, but seasoned investors also use this to test and learn and experiment with various levels of risk.
You can simulate the share trading and see how you would have fared over a set period with your ‘dummy’ investment portfolio before starting to invest for real. Just remember that past performance may not be a reliable indicator of future performance!
Share investors should start early, top up and reinvest, be patient and keep the end goal in mind.
A good financial advisor will do so much more than simply tell you what shares to buy. A good advisor will focus on helping you determine and articulate your financial goals, as well as help identify your current and future risks.
Our team at Tribel can help you set up an investment plan to grow, manage and protect your wealth by utilising a range of asset classes and investment strategies based on a structured and research driven approach.