How To Understand Shares Even If You Have Zero Idea What Shares Are
If you’re lucky enough to have some cash burning a hole in your pocket, popping it under your mattress isn’t really the ideal way to go about things. So where should you put the stuff? It is never too early to start investing in shares. And investing isn’t just something 40- and 50-somethings should get excited about – it could be one of the smartest things you do this decade.
If the reason you haven’t started a share portfolio yet is because it all seems a bit confronting and confusing, it doesn’t need to be that way. This straightforward guide for rookie investors is the answer to the questions you never asked us.
First things first – what is the share market?
A share is your part of ownership in a company – your slice of a company’s pie. It could be as little as one share in a company that has one billion individual shares.
All companies intend to make a profit, so when a company makes one, because you own a small piece of said company, you share in the takings.
Most big Australian companies list their shares on the Australian Stock Exchange (ASX). The ASX is a trading platform, just like eBay, whereby people buy and sell things, but in this case it is shares in a company. For example, JB HiFi is listed on the ASX. It is split into 100 million parts (shares). Each share is currently worth about $20. Thousands of every day Australians own shares in companies like JB HiFi and they buy and sell them on the ASX every day.
Terminology and stuff
Financial terminology sometimes seems like it was intentionally created to freak you out. But don’t let it keep you away from investing. Here’s a breakdown:
One small right of ownership to a company that can be bought and sold. Each company can be split into thousands or millions of individual shares.
A broker is the person that makes the buy or sell of a share happen. Most brokers are computers these days and charge as little as $10 per buy or sell.
This is the profit that a company passes on to its shareholders, in cash.
This is the fancy name for how much profit your share makes you every year, as a percentage of the price. Let’s say your share is worth $1 and it pays you a 10 cent dividend, then its yield for the year is 10%.
This is how much your share either grows or drops in a year.
This is like a health check of the total share market on any given day. Its kind of like putting every share in one big shopping basket, and checking how much that basket is worth at the end of each day.
This is the profit you make on buying and then selling a share.
Do I need lots of cash to invest?
No, you can start with as little or as much as you like. Bear in mind you pay a small fee when you buy shares, so if you only invest a little the cost is a bigger proportion of what you invest, so it just may be worth saving a few thousand dollars before you start.
Does this mean I will be buying and selling all the time?
This isn’t the Wolf of Wall Street. You don’t need to be a hot-shot banker to invest in shares. Given that shares can go up and down a lot, it makes sense to ride the waves and stick it out over the longer term.
The longer you hold a share, the less you have to worry about it going up and down – think big picture.
How much will it cost me?
Buying and selling shares is cheap. Most brokers only charge around $15 per share trade.
Too much choice, where do I start?
There are heaps of online resources around, most are free, too. The resources split shares into all sorts of categories – mining, banking, food, retailers. The best bit is, it’s totally up to you where you put your money. The resources will tell you how well the shares have tracked in the past and how much cash you might expect in your pocket every year.
Sign up for an account, which is usually free and you will be surprised at how much advice is waiting there for you, totally gratis.
How much cash will I make?
How long is a piece of string? All shares are very different.
The Australian sharemarket has provided really strong returns for Australians over the years. If you were to invest $10,000 in shares in 1985, it would now be worth $219,730 that’s a return of 10.8% per year. Pretty impressive, huh?
Over the past 10 years, there have been years here in Australia when shares have gone up 45% over one year but also down 40% over a year. Of course there will be shockers and also great years, that’s why holding on for the ride is less risky.
But why do shares go up and down?
The quick answer is: for a million reasons. But in reality they go up and down depending on how investors feel about the share. If they think the company is going to do well, more people want to buy, so they go up. If people think the company is in trouble, they sell and the price goes down.
Think of it this way: you have this awesome vintage leather jacket that you’ve put on eBay. You’re selling it at the price you think it is worth, and your potential buyers will have their own idea of what that jacket is worth and bid accordingly. In the same way, buyers and sellers buy and sell shares depending on what they think the share might be worth. Today that jacket might be worth $100 but tomorrow someone might find it far more interesting and offer you $150. Bingo, now you are worth more than you thought. The same applies for shares.
What happens when I sell?
When you sell a share, the person who buys it from you sends the money to the broker and you get your cash within three days.
It will pay to let your accountant know that you have sold shares, as any profit you make may add to your tax return.
Lachlan Beaton is a freelance writer, share market trader and property investor. Lachlan is a Certified Practising Accountant and worked for a number of years assessing and rating property investments for various clients. Over the past decade, Lachlan has invested in five properties, across both Melbourne and Sydney. Lachlan is also a mental health and equality advocate.