It’s the biggest game in town. Trading on the world’s stock markets is a daily industry worth billions of dollars. It is the fuel that drives capitalism and is one of the most commonly used forms of investment for everyone from billionaires to pensioners.
Owning shares can be an effective strategy for wealth creation but it does come with its risks. What goes up can come down and has done so, however when taking a long term view the share or stock market has historically offered annual returns higher than more risk averse forms of investment.
So, what should you consider when looking to become involved in the share market?
What is your risk tolerance? Greater returns usually come with greater risk. ‘Blue chip’ stocks which have been around for a while and represent the largest listed companies are generally more stable than ‘speculative’ stocks that could offer heady gains. Having a balanced portfolio can help spread your risk across different types of investments.
Trading versus investing. Share traders look to buy and sell regularly in the market, seeking undervalued investments and selling out of those they perceive as being overpriced. They will often base their decisions on predicting the share markets cycle of ups and downs. Share investors take a longer-term view, preferring to hold stocks and ignore any short-term fluctuations that might happen. Warren Buffet is the most famous example of an investor who seldom ever sells a share he buys.
Brokers. Stockbrokers can be a great source of advice regarding what is happening in the marketplace. They are generally divided into full service brokers, who do market research and offer investment advice, and discount brokers who simply carry out transactions. Full service brokers will generally charge a higher brokerage fee for their services.
Information. If you are interested in doing your own research there are a wide selection of information sources available. The Australian Financial Review is a well-established print and online publication carrying news for many of the listed companies here in Australia. Websites, such as the Motley Fool, also provide online information.
Local or International? Among the decisions you will make is whether you wish to invest in Australian shares or those that are more international. The United States represents the world’s largest stock market and provides exposure to international economic opportunities that the Australian market can’t provide.
Listed versus new issues. You can choose to buy ‘on market’ for existing shares. From time to time, new companies are listed and if you are in the position it’s possible to access shares ahead of them being listed. Alternatively, if you are an employee of a company that is listed there may be the chance to access shares through an employee share scheme that comes with additional benefits.
How to Hold Shares. You may choose to own shares in your name, a company name, a trust or even a self-managed superannuation scheme and it pays to get advice before choosing how you will do it. You can also choose not to own shares directly, instead investing in a fund that invests for you. Some funds are managed by professional investors who will make buying and selling decisions while others are called index funds, and will simply buy and hold a parcel of shares that represent a certain industry.
How to Buy and Sell. Thanks to the modern world of computing you can take much of the emotional buying and selling decisions out of human hands. Limit orders will only see a purchase made if a certain price or terms are met. Likewise Stop Loss orders can be triggered if a share price falls below a certain value.
The stock market is a complex and sophisticated investment vehicle and it pays to do your research thoroughly before jumping in. It has made fortunes and cost fortunes but for most investors the reality is somewhere in between. Get good advice from experts and mentors who can help you develop an investment strategy that will work for your needs.
If you’re thinking about buying or selling shares, you should first consider talking to a financial advisor who can provide you with the knowledge and advice to make the right decisions.
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The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a Financial Advisor or other finance professional.