Lexi Webster
Investing in shares can be a smart way to make your money work harder. While there are no guarantees, there are some proven practices that can help you maximise your profits. These include reinvesting your dividends, investing in low-cost index funds, and staying invested long-term. In Australia, there are thousands of public companies on the share market across many industries. When you buy shares, you become a part-owner of a company and can benefit from dividends and other advantages. To buy shares, you need to use a third party called a 'broker' and pay a brokerage fee.
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What You'll Learn
Long-term investing
There are a few ways to make money from long-term share investing. One is to benefit from capital growth, or capital gain. This is when you buy shares at one price and sell them at a higher price. The longer you hold the shares, the more time there is for the company's profits to grow and the share price to increase.
Another way to make money from shares is through dividends. Sometimes, when a company makes a profit, it will give some of that profit back to its shareholders. Dividends are usually paid in cash and based on the number of shares owned. You can choose to reinvest these dividends to buy more shares, which will help your earnings compound faster. Many financial advisors recommend reinvesting dividends to enhance compounding.
There are a few things to keep in mind when investing for the long term. Firstly, investing comes with the risk of losing money, so it's important to weigh up the likelihood of loss against the potential for returns. Secondly, diversification can help lower your overall risk. You can diversify by choosing different investment types and investing in businesses of different sizes and industries.
If you're looking for long-term investment opportunities in Australia, analysts have identified a few ASX growth shares to buy and hold. These include NextDC, which is Australia's leading data centre operator, and Temple & Webster, Australia's leading online furniture and homeware retailer.
You can also use investment platforms like Sharesies to invest in over 10,000 companies and ETFs in the US, Australia, and New Zealand.
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Reinvesting dividends
When a company makes a profit, it can choose to give some of that profit back to its owners—the shareholders. These are called dividends and are usually paid in cash a couple of times a year. The amount is generally based on the number of shares owned or purchased before a particular date (the 'ex-dividend date'). Dividends are not mandatory, and companies often choose to reinvest their profits to increase capital gains.
Most brokerage companies give you the option to reinvest your dividend automatically by signing up for a dividend reinvestment program, or DRIP. In Australia, Commonwealth Bank offers a Dividend Reinvestment Plan (DRP) that allows eligible shareholders to reinvest their dividends to receive additional shares instead of a cash payment. This is done without incurring a transaction cost (brokerage).
It is important to remember that there are no guarantees in investing, and you might lose money. There may also be tax implications with dividend reinvestment plans, so it is recommended to speak to a tax professional.
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Diversifying your portfolio
Exchange-Traded Funds (ETFs)
ETFs are a great way to diversify your portfolio without needing a large amount of capital. They are baskets of shares that make up an index, such as the S&P/ASX 200. By investing in an ETF, you gain exposure to a diverse range of companies and industries, reducing your risk. ETFs also generally have lower ongoing fees than managed funds. However, if you plan to invest small amounts regularly, you'll need to consider the broking fees on each contribution.
Listed Investment Companies (LICs)
LICs pool money from multiple investors and use it to invest in a diverse range of companies and assets. They pay dividends from their earnings and tend to have lower fees than managed funds. LICs may not be suitable if you want to invest small amounts regularly due to the broking fees on each contribution.
Index Funds
Index funds are a type of investment that mirrors a market index, such as the S&P 500. They are a simple and often lucrative way to invest in stocks without needing extensive knowledge about individual companies. By investing in an index fund, you automatically diversify your portfolio across dozens or hundreds of stocks, reducing your risk.
Dividend Reinvestment
Rather than receiving dividends as income, you can choose to reinvest them by purchasing more shares. This enhances compounding and can lead to faster wealth accumulation. Many financial advisors recommend long-term investors enrol in dividend reinvestment programs (DRIPs) offered by brokerage companies.
Choose Shares from Different Industries
Investing in shares from a variety of industries can help minimise your risk. If one industry experiences a downturn, your investments in other industries may continue to perform well. This strategy ensures your portfolio is not overly exposed to the risks of any single industry.
Remember, while diversifying your portfolio is important, it should be done in conjunction with other proven practices and a long-term perspective. There are no guarantees in investing, but by following these strategies, you can increase your chances of success in the Australian share market.
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Understanding brokerage fees
Brokerage fees are charged by brokers and online share trading platforms to process transactions, i.e., the buying or selling of shares. These fees are charged to cover the administrative work required to confirm the sale and transfer of securities to the buyer. Brokerage fees are typically calculated based on a percentage of the total transaction amount, as a flat fee, or a combination of both. Most platforms have a trade value-tiered approach, with the fee per trade being the brokerage fee. For example, Stake charges a brokerage fee of $3 for trades up to $30,000 or 0.01% for trades above $30,000 when buying or selling Australian shares.
It's important to note that brokerage fees can significantly impact the overall share trading experience, especially for those investing smaller amounts. For instance, if you invest $10,000 in one transaction, you may pay less in brokerage fees than if you used dollar-cost averaging over multiple transactions. Additionally, when a brokerage advertises zero-commission fees, they usually charge higher fees on spreads, which is the difference between the buying and selling prices of a financial asset.
When trading international shares, investors should be aware of currency exchange fees and other additional costs. For instance, non-US residents trading in the US market must complete a W-8BEN form for tax purposes, and withholding taxes may apply to any profits made. Furthermore, an overnight funding fee may be charged when holding a trading position overnight on leveraged trades, which can be risky due to the potential for greater profits or losses.
While online investment brokers are generally cheaper than face-to-face brokers, the level of customer service may vary. It is essential to research the different platforms and their fee structures to find the one that best suits your investment needs.
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Knowing the risks
Shares are considered the riskiest type of investment, and there are no guarantees when investing. However, there are ways to mitigate the risks.
Firstly, it is important to understand the basics of share investing and to be aware of the fees involved. Brokerage fees are incurred each time shares are bought or sold, and these can eat into any profits made.
Secondly, it is important to do your research and understand the risks before investing. Shares in a company with a long-term falling share price are likely to be a high-risk investment. Conversely, rapid and significant share price growth can also be a cause for concern, as prices may fall again if the company does not deliver on its forecasts. It is also important to understand business cycles and how companies perform during different phases of the cycle. This can help to manage the effects of timing risk.
Thirdly, it is recommended to diversify your portfolio. This can be done by investing in funds that track major indexes, such as the ASX200, or by using a managed fund, where a professional fund manager buys a range of shares and assets on your behalf.
Finally, it is important to remember that investing in shares should be a long-term strategy. While share prices can fall, over the long term they tend to grow in value exponentially. This means that holding onto shares for the long term can help to ride out any short-term fluctuations in price.
It is always recommended to seek independent financial advice before investing, to ensure that you understand the risks involved and that you are making the best decisions for your personal financial situation.
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Frequently asked questions
There are a few ways to make money from shares. One is to sell your shares at a higher price than you bought them for, also known as "capital growth" or "capital gain". Another way is to receive dividends, which are regular distributions of profits paid out to shareholders.
You can buy shares through an online broking service or a full-service broker. You will need to open an online trading account and decide how you want to invest. You can either own shares yourself or pool your money with others through a managed fund.
The amount of money you need to start investing in shares will depend on the cost of the shares you want to buy and any additional fees or brokerage costs. Some shares can cost hundreds of dollars each, and you will also need to pay a fee each time you buy or sell, which can be around $20 per trade.
Financial advisors often recommend investing in funds that track major indexes, like the ASX200 or S&P 500. These funds allow you to benefit from the average annual returns of the stock market with less risk than investing in individual stocks.
It's generally recommended to stay invested in the share market for the long term, through good times and bad. This allows you to collect dividends and benefit from compound growth over time.
