Investing Shares

GUIDE: How to Invest in Shares for Beginners

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Here is my simple guide: how to invest in shares on the Australian Stock Exchange (ASX) for beginners.

What Are You Going to Invest In?

There are over 2,400 shares available to invest in on the ASX.

Just because a company is listed on the ASX, doesn’t mean it is a good investment.

As an investor it is your job to seek out and find companies with the potential to grow their profits, which in turn will result in an increased share price.

how-to-invest-in-shares-search

ETFs: A Good Place to Start

For new investors Exchange Traded Funds (ETFs) are a good place to get started investing in shares.

There are over 150 ETF’s available on the ASX, so it is far easier to find a suitable investment option.

etf-types

An ETF will give you a broad exposure to a market index, which is preferable to buying an individual share for new investors.

To review the performance of ETF’s listed on the ASX go to the Morningstar website:

ETF Performance Table

morningstar

etf-performance-table

 

How to Invest in Shares

Read my complete guide to buy and sell shares online below:

5 Steps: How to Buy Shares on the ASX

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Robo Advisers: A More Automated Approach

If you want to get started using a more managed approach, why not consider a robo-adviser.

Robo-advisers build a portfolio of ETF’s for you, so you don’t have to do any research, or make investments – it is done for you.

REVIEW: Acorns Fees & Costs Explained

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Why Do Shares Go Up & Down?

Investors trade shares in order to make money. There are two ways to make money in shares.

  1. Buy a share for $X and then sell it to someone else for $X+1, realizing a profit.
  2. Buy a share for $X and hold it because the share pays a dividend of $Y per annum, giving you an income to live off.

It all sounds simple enough but why would someone pay more for a share I that I just purchased, and where do dividends come from?

The answer is earnings.

When you purchase a share in a company, you become a part owner or shareholder of that company. As a part owner of a company, you are entitled to a share of the profits or earnings from that business.

As an investor you want to be a part owner of a business that grows its profits over time.

Earnings in Action: Commonwealth Bank of Australia

The Commonwealth Bank (CBA) was founded in 1911 and owned by the Australian Government before it was privatised and listed on the ASX on 12 September 1991 for $5.40 per share. When a company ‘lists’ its shares on the market, it means it is selling them to investors on the share market.

CBA Google

Below we have plotted the earnings of CBA

  • The revenue per CBA share is plotted in green.
  • The earnings / profit per CBA share is plotted in orange.
  • The monthly share price of CBA shares in plotted in blue and red.

CBA Earnings History

As you can see, the revenue and earnings and share price of CBA has increased over time. A share price can only rise over the long term if revenue and earnings are rising.

Earnings are the horse that leads the share price cart.

The Downside of Earnings in Action: Fairfax Media

Just as growing earnings will lead a share price higher, slowing earnings will also cause share prices to drop. A prime example of this in action can be seen with Fairfax Media, an old media company in Australia.

Fairfax grossly misjudged the move away from print media to online missed the boom in new media and saw earnings steadily decrease to a point when they had to write off the value of some parts of their business. This can be seen in the orange earnings line on the below chart.

Fairfax Earnings History

Fairfax shares traded as high as $5.92 in March 2000 only to drop 94% to a low of 35 cents in 2012. In that time dividends from Fairfax shares dropped from 11.5 cents / share to 2000 to 3 cents per share in 2012.

Once again earnings are the ‘horse’ that leads the share price ‘cart’, only this time it wasn’t a good result for investors.

Q.$5,400 Invested in CBA shares in 1991 is now worth?

Let’s imagine ‘Sam the investor’ purchased 1,000 shares in CBA for $5.40 each (total investment of $5,400) when they listed in 1991. Fast forward to 2015 and Sam’s CBA shares are now worth almost $70,000 and he has received over $65,000 in dividends since 1991.

In 2015 CBA paid a total dividend of $4.20 / share, not bad for a share that cost $5.40 in 1991.

CBA Growth

A.Over $134,000

 

Summary

So there you have it – how to invest in shares on the stock market explained.

The Wealth Guy Signature

 

Joshua Stega

The Wealth Guy

Joshua Stega is an expert financial adviser and founder of JAS Wealth in Sydney. He specialises in the habits and behaviours of wealth. Joshua has a Masters in Taxation and Financial Planning and is regularly featured in the media

M.TaxFP, LLB(Hons), B.Bus(Acc), FTI, Adv.DipFP, Dip.FP, SMSF Specialist
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you with this.

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