Welcome back to Investing Basics – a series that helps you cut through the jargon and understand how to make your money work for you.
Last week we went through what a share is and where you can buy one. Now we’re across the basics, let’s examine the process of buying one.
Online trading platforms have made buying shares on the ASX simple. These days can do the whole thing from your smartphone.
How to buy a share
How to buy a share – trading floor
Before you invest, it’s crucial to do thorough research and understand what you’re investing in. You should invest only what you can afford to lose.
Step 1: Open a brokerage account
As we discussed last week, you can’t walk into the Australian Securities Exchange (ASX) and buy a share over the counter. Shares are sold via financial professionals known as brokers who will take your order and execute the trade on your behalf.
Broadly speaking, there are two types of brokers:
1. Full-service brokers – offer investors a complete stockbroking experience including recommendations on individual share selection, access to research, new investment opportunities like initial product offerings, and advice on portfolio construction. However, all this comes at a price. Commissions for full-service brokers are much higher than online brokers.
2. Online discount brokers – offer simple, online, no-frills access to share trading, enabling you to buy shares in a few minutes with the click of a couple buttons. All the major banks have broking websites that allow you to use the funds in your bank account to buy shares. Several non-bank brokers such as CMC Markets, SelfWealth and Bell Direct vie with the big banks with offers of better service at cheaper rates. Although the service is much cheaper than using a full-service broker, you may need to separately buy investment insight and research to give you guidance about which shares to purchase.
When choosing a broker, here are some things to consider:
Accessibility – Over the phone, desktop, smartphone, smoke signal – each broker will execute trades in a different manner. Look for a process that suits your needs.
Cost – Brokers will charge a fee known as “brokerage” for executing your trade. Depending on how much money you are trading and which platform you use, the charge will either be a flat fee or a percentage fee. Brokers may also charge you to open an account and/or ongoing account fees.
Complexity – Some broking websites are built for retail investors – you and me – while others are built for experienced traders, teeming with complex charts and flashing numbers. Select one that suits your level of experience.
What you can trade and how often – If you only want to buy and sell shares in companies listed on the ASX then you can select almost any online broker. However, if you want access to international stock exchanges – e.g the New York Stock Exchange or the London Stock Exchange – then you’ll need to be more selective with your broker. Also, if you want to trade frequently – more than one trade per month – some brokers will offer you a better service than others.
Once you’ve selected a broker, open an account. Generally, you’ll need to provide a few details – name, address, date of birth – proof of identification – passport, driver’s licence, Medicare care — and your tax file number etc. Westpac says you can open an account in 5 to 10 minutes.
For this article, let’s focus on buying a share via an online platform.
Note: most broking platforms require you to be over 18 years ago and an Australian resident to apply for an account.
Step 2: Select the shares you want to buy
Now that you’ve set up a brokerage account, it’s time select the shares you want to buy. The ASX has more than 2200 companies listed, but as a first-time investor, you’re probably going to want to stick with the largest 200 companies by market capitalisation (calculated by multiplying the amount of shares a company has by the current market price of one share). This, incidentally, is known as the ASX 200.
The top 50 companies, also known as blue chips, are considered the safest as they represent major Australian companies, which are stable and have been around for a long time such as global mining giant BHP.
Here’s a list of the top 50 companies (by market cap) trading on the ASX.
Remember, investing, by its very nature, is risky. Companies may fall short of their targets or face new competition in which case their value – and consequently their share price – may drop. But you can minimise this by investing in reputable companies that you like and by taking a long-term approach to investing.
It’s often said you should buy what you know – a company that you understand at a fundamental level, in an industry you’re familiar with. For instance, it’s probably best to steer clear of lithium stocks if you have little knowledge of what lithium is. Also look for companies that you think have good long-term future growth prospects.
Don’t worry if you stumble at first, everyone does. Making mistakes is part of the learning process.
If you’re stuck for ideas you can take a look Morningstar’s best stock ideas list or read the analysts’ insights into the ASX top 200 companies. This will help you make informed, confident investment decisions. It’s a good idea to reach out to a broker or financial adviser for guidance.
Step 3: Decide how many shares you want
How many shares you want to buy will largely depend on your budget – how much you’ve saved for investing. Don’t push all your savings into a single company – that’s a highly risky strategy. Start small, get a feel of what it’s like to own a stock and discover your capacity to hold a stock through a fluctuating market.
Keep in mind online platforms often state you must spend at least $500 on an initial trade. Therefore, if you want to invest in a company whose share price is trading at $5, you’ll need to by at least 100 shares ($5 x 100). After your first order, you’ll be allowed to buy shares in smaller amounts.
Step 4: Place an order
We’ve set up a broking account, selected our company or companies and the number of shares we want to buy. It’s time to place an order! The process should be similar across all online brokers. For our example, let’s look at CommSec.
Log in using your client number and password
Hit the trading tab. The following screen should appear. It’s here where you will place your order.
CommSec Screenshot 1
CommSec is the Commonwealth’s online sharetrading platform
Type in the code (ASX ticker code) of the company you want to buy. This is a three-letter code given to every company listed on the ASX. If you can’t remember the company’s code, click the magnifying glass and type in the name of the company. For this example, I’m going to buy Telstra Corporation (ASX: TLS). Down the side on the screen, the share’s details will appear including the current trading price. Then type how many shares you want to buy.
CommSec Screenshot 2
Jargon alert! You’ll now see the following terms: “price orders” and “market orders”. The ASX is an exchange, meaning it’s a place you go to to buy shares from someone looking to sell their shares – a marketplace much like eBay or gumtree. When you decide to buy a share, you can either request to buy it at a specific price (or better) – known as a limit order – or request to buy it as soon as possible at the best available price – known as a market order. With a limit order, the stock will be automatically bought on your behalf when the price becomes available. I’m going to buy shares in Telstra “at market” – meaning at the current offer of $2.77 per share.
After you’ve filled in all the details, CommSec will calculate the cost of your order, including the brokerage fee + GST.
CommSec Screenshot 3
The final step is paying. Make sure you review your purchase before hitting submit order. If you’ve bought “at market”, your order should take a maximum of two business days to settle (T+2).
Step 5: Look after your share
Congratulations! You’re now an investor in the Australian stock market with your very own share. You’ll finally have a reason to pay attention to the business section of the news, and maybe even start to understand it better. Having skin in the game makes you a shrewder investor. Soon you may also receive a dividend – a portion of the company’s profits – in the mail, just for being a shareholder. It’s an exciting moment.
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” – John D. Rockefeller
Remember, the value of your share will rise and fall but don’t fret – as a long-term investor you can weather the storm. The key is to start on the journey, diversify your stock portfolio by buying shares in different companies and sectors, and stay in control.
Here’s what you can do to keep on top of your investments:
Track the performance of your share via Morningstar’s ‘Portfolio Creator’
Read Morningstar analyst updates on the company you’ve invested in to understand where it’s going
Establish some investing rules that you can consult in times of volatility
Keep your eyes out for more investing opportunities