Lexi Webster
Investing in the Australian stock market can be a great way to build wealth over time. The Australian Securities Exchange (ASX) is the largest stock exchange in Australia, with over 2,000 companies listed and a total market capitalisation of over $2 trillion (AUD). When you buy shares in a company, you purchase partial ownership and the right to vote on its management. There are various ways to buy shares, including through a broker or online platform, and different investment strategies to consider, such as buying and holding or trading more frequently. It's important to remember that investing involves risk and there are no guarantees, so educating yourself about the market, seeking professional advice, and understanding your financial goals and risk tolerance are crucial steps before investing.
| Characteristics | Values | |
|---|---|---|
| Number of companies listed on the Australian Securities Exchange (ASX) | 2,000-2,300 | |
| Examples of companies listed on ASX | Commonwealth Bank of Australia (CBA), Rio Tinto (RIO), Woolworths (WOW) | |
| Ways to make money | Capital growth/gain, dividends | |
| Ways to lose money | Selling shares for less than you paid for them, value of shares dropping to $0 | |
| Common way to make money | Buy-and-hold strategy | |
| Index Funds | Aim to replicate the movement of an index, e.g. S&P/ASX 200 | |
| Average total return of S&P/ASX 200 Index over 10 years | 9.3% each year | |
| Minimum marketable parcel of shares | $500 | |
| Brokerage fees for online brokers | Start at around $5 per trade | |
| Brokerage fees for CommSec Pocket | $2 per trade under $1000 | |
| Brokerage fees for trades over $1000 with CommSec Pocket | 0.2% fee | |
| <EOS_TOKEN> | Other brokers | CMC, Superhero, Westpac, NAB Trade, Bell Direct |
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What You'll Learn
Buy-and-hold strategy
A buy-and-hold strategy is a passive investment strategy where investors buy stocks or other securities and hold them for a long time, regardless of fluctuations in the market. This strategy is underpinned by the belief that the stock market will show an upward trend over extended periods.
By adopting this strategy, investors can distance themselves from the emotional highs and lows of market movements and avoid common behavioural pitfalls, such as herd mentality or recency bias. Instead, they can focus on the underlying value of their investments, trusting that market volatility will smooth out over time and that their portfolio will grow in the long run.
A key advantage of the buy-and-hold strategy is that it allows investors to take full advantage of compounding returns. Compounding is the process where the returns generated by an investment earn further returns, creating a snowball effect over time. For example, if you invest in a stock that grows at an annual rate of 7%, your return in the second year will be calculated based on your original investment plus the returns you earned in the first year.
The buy-and-hold strategy also eliminates the need for market timing, which is incredibly difficult even for professional investors. Instead of trying to guess when prices will rise or fall, investors trust in the long-term growth of their chosen securities.
However, there are some disadvantages to this strategy. For example, buy-and-hold investors may neglect to implement simple risk management strategies such as rebalancing their portfolios. Additionally, there is no way to profit from market volatility, as investors are already fully invested.
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Investing in funds
Investing in the Australian stock market carries a certain amount of risk, and there are no guarantees. However, there are some principles that can help maximise your chances of making money.
One of the most common ways to invest in the Australian stock market is to buy shares. You can do this through a full-service stockbroker or online brokerages like eToro, Tiger Brokers, and CMC Markets. You can also buy shares indirectly by purchasing units in a managed fund or exchange-traded fund (ETF).
ETFs are investment funds traded on stock exchanges, and each ETF is a collection of assets, often composed of stocks in line with an index like the ASX200. They offer instant diversification with far less time commitment than building a portfolio of individual stocks. ETFs are not limited to stocks but can also bundle in other asset classes, including bonds and commodities.
Managed funds or ETFs can be a simple way to build a diversified investment portfolio across a wide range of asset classes and investment strategies. They are also a good way to gain exposure to particular markets or sectors. For example, you can invest in ETFs that focus on a specific market sector, investment theme, or strategy, such as dividend-focused ETFs.
Index funds are a type of fund that aims to replicate the movement of an index, like the S&P/ASX 200, and charge a small fee for the service. By purchasing shares in an index fund, you can expect a portfolio return very close to the underlying index. While your investment success won't be stock-specific, it will depend on the movement of the market as a whole.
It's important to remember that investing in the stock market can result in losses, and you should only invest what you can afford to lose. Before investing, consider your investment goals and risk appetite, and educate yourself about the economy, interest rates, exchange rates, and government policy.
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Understanding dividends
When you buy shares in a company, you purchase part-ownership of that company. Dividends are a way to make money from this ownership. Dividends are periodic income payments from the company, based on its earnings. While the small amounts you get paid in dividends may seem negligible, especially when you first start investing, they are responsible for a large portion of the stock market's historic growth.
Many businesses pay their shareholders dividends, but this is not mandatory. Companies will often choose to reinvest their profits to increase capital gain, rather than give the money to shareholders. You can see how much a company or fund has paid in dividends over the past year by looking at its 'Gross Dividend Yield'. This is the historical dividend as a ratio of the share price. This figure gives a general view of how much in dividends a share has paid in the past, but it doesn't give a 100% accurate view of what it may pay in the future.
To make money from shares, you generally need two things to happen. First, your shares need to be worth more than you paid for them. Second, you need to sell those shares at that higher price. That's how you change a 'paper gain' into a capital gain, or cash.
It's important to remember that investing involves risk. You aren't guaranteed to make money, and you might lose the money you start with. There are two common ways to lose money. One is that you sell your investment for less than you paid for it. The other is if the value of your investment drops to zero, and you don't get a chance to sell it at all (this is rare but does happen).
There are a few ways to purchase shares. The most common way is "On Market", which means buying them on an exchange. There are two primary Australian exchanges: The ASX and CHi-X. You can also buy shares through an Initial Public Offering (IPO) when a private company lists on a stock exchange to raise funds by selling shares to the public. Another way is an Off Market Transfer, which is a private sale normally done between family members or when dealing with deceased estates. No broker is required for this type of transaction.
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Researching companies
When researching companies to invest in on the Australian stock market, there are several factors to consider. Firstly, it is important to understand the basics of the stock market and the economy, including interest rates, exchange rates, and government policies. This knowledge will help you predict how these factors may impact a company's performance.
MoneySmart suggests starting with companies in an industry you are familiar with, as this can make it easier to understand their business model and performance. While past financial performance can be an indicator of stability, what drives share prices is a company's future outlook.
There are several sources you can refer to when researching a company. These include the company's annual report, yearly and half-yearly financial results statements, and the ASX website. Additionally, online brokers often provide access to company research and recommendations. You can also refer to sources such as a company's "Gross Dividend Yield", which shows how much they have paid in dividends over the past year as a ratio of the share price. This can give you an idea of their dividend history, although it may not accurately predict future dividends.
It is also important to remember that cheap shares do not always represent good value. While "penny stocks" may seem appealing due to their low price, they may belong to small companies with unstable track records.
When deciding which stocks to pick, consider investing in large companies that operate in industries Australia is known for, such as banking and mining. Additionally, consider your investment goals and risk appetite. If you are a beginner, investing in individual companies may not be advisable, and you may want to consider investing in funds that track major indexes like the ASX200. This will allow you to benefit from the average annual returns of the stock market while reducing the risk associated with individual stocks.
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Using a broker
In Australia, you generally need a brokerage account to trade stocks. Brokerage accounts provide access to stock exchanges where securities are bought and sold, allowing you to trade shares of publicly listed companies in Australia and across the globe.
There are two main types of brokers: full-service brokers and online brokerage services. With a full-service broker, the broker does the trading for you and can advise on what to buy or sell. A broker must have a reasonable basis for recommending a company and must disclose any interest they have in that company. Online brokerage services, on the other hand, provide a platform for you to make your own investment decisions, and typically charge lower fees.
When choosing a broker, it's important to evaluate the different services and tools offered. Most brokerage platforms offer real-time market data, research reports, stock analysis, and educational materials. You should also consider the fees charged by the broker, such as brokerage fees and inactivity fees.
Before funding an account and starting to trade, it's recommended to practice with a demo account to get a feel for the trading experience. You can also use the Australian Securities Exchange (ASX) "Find a Broker" tool to locate a broker that suits your needs.
Some popular brokers in Australia include:
- CommSec: The share-trading arm of the Commonwealth Bank of Australia, offering simple platform access and bank-backed security.
- Interactive Brokers: Regulated by the Australian Securities Investment Commission (ASIC), providing access to trade ASX stocks with a $10,000 minimum deposit.
- Pearler: Offers flat $6.50 trades and currency conversion at 0.5%, with a $500 minimum investment.
- Superhero: Charges $5 for ASX trades with a $100 minimum trade size.
By using a broker, you can gain access to the stock market, execute transactions, and receive guidance or tools to make informed investment decisions.
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Frequently asked questions
There are a few ways to make money on the Australian stock market, including:
- Capital growth or capital gain: Buying shares at a certain price and selling them at a higher price.
- Dividends: Many businesses pay their shareholders dividends, or periodic income payments based on the company's earnings.
Investing in the Australian stock market can be intimidating for beginners, but understanding the basics can help you start with confidence. You can access bite-sized learning and tips to build your investing confidence through the CommBank app and the ASX website.
It's important to educate yourself about the economy, interest rates, exchange rates, and government policy, and understand how these factors may affect a company's performance. MoneySmart suggests starting with companies in an industry that you know something about, as this may make it easier for you to understand how a business is doing.
Investing in the stock market involves risk and there are no guarantees that you will make money. It's important to remember that you might lose the money you start with. The most common way to lose money is if you sell your shares for less than you paid for them.
