How to buy shares

• Discover the ins and outs and ups and downs of share investing.
• Learn how to buy shares step-by-step online.
• Get answers to the questions most often asked by beginner share investors.

The growth of online investing platforms with vastly lower brokerage fees has made investing in shares easier, more affordable and therefore more attractive.

New to investing? Read our comprehensive step-by-step guide on buying shares online.

What are shares?

Shares are units of ownership of a company listed on a stock exchange. By buying a company’s shares, you become an investor in that company, and hold a percentage of ownership. The company gives its shareholders a share certificate that represents their ownership of that company. Today, share certificates are mostly held as digital versions.

What is share investing?

Share investing is buying shares of companies listed on a stock exchange.

When you buy a share of a company listed in the ASX, for example, you are buying a unit of ownership of that company. Through this process you become a shareholder and investor of that company.

Investors usually buy shares because they expect a better return than they would get by leaving their money in a bank account. The return may come in the form of dividends (a share of the income the company earns from its activities) or capital growth (an increase in the price that other investors are prepared to pay for the share) or, if you are prepared to take the risk, from trading shares to take advantage of short-term market price fluctuations.

What is a share market?

A share market is a market where shares of companies are issued and traded publicly.

Although we use the term share market interchangeably with the term stock market, there is a difference. A share market only allows you to trade in shares. In a stock market you can trade in shares as well as other types of financial instruments like EFTs, bonds, mutual funds and derivatives.

In the sharemarket, you can only buy shares that have been listed on a stock exchange. The first time a company begins issuing shares, it’s called an IPO, short for Initial Public Offering. When a company completes an IPO in Australia, that company is said to be listed on the Australian Securities Exchange (ASX). Companies can subsequently offer more shares to the public when they need more funds for new projects and expansions.

Can anyone buy shares?

Technically, the answer is yes. However, to buy shares on the Australian Securities Exchange, it is necessary to establish an account with a stockbroker. Accounts may only be opened by someone who is aged 18 or older.

Companies and trusts can also buy shares.

Pros and cons

As with every investment vehicle, investing in shares has its pros and cons.

Shares quoted on the ASX and other global stock markets are traded electronically. You can only trade in them through a broker. When deciding on which broker to use, consider the following points:

• How much are the brokerage costs?
• Are there any free or discounted transactions offered?
• Is the platform easy to use?
• Does it provide market information, research and recommendations? If so, are you paying a high price for it in brokerage fees?
• Is there any online education and/or demo account provided?

Step 1: Fund your account

Opening a brokerage account is relatively easy and most brokers let you do it online. The next step is to fund your account before you can actually begin investing in shares.

You can usually transfer money into your trading account from your bank transaction account, and some brokers offer other funding methods.

Step 2: Decide how much you want to invest

When you are starting out with share investing, it is best to start with a small amount of money. Later, when you are more confident you can increase this amount. Always plan your investments based on what you can afford.

Step 3: Shares or an ETF?

ETFs present an easy way to diversify your portfolio and spread your risk, instead of investing in the shares of an individual company. The upside is likely to be less exciting, but the downside is probably less hazardous.

Step 4: Decide your order type

Here are the different types of orders you can place with your broker:

• Market order is a request to buy or sell shares at the best available price ASAP.
• Limit order is a request to buy or sell shares at a defined price or a better one.
• Stop-limit order is given by nominating a price range within which you are willing to buy or sell your shares. Your order will be executed when it is possible to buy or sell your shares at a price within your range.
• Stop order or stop-loss order: The stop orders you give are executed only once a stock reaches the given price, which is called stop price or stop level. When market prices are dropping, a stop loss order becomes executed in order to avoid further losses before prices drop further.

Step 5: Place your order

Once you have funded your trading account, know which share you want to buy, the number of shares you want (or the amount you want to spend) and decide on the type of order you want to place, then go ahead and place your order. The exact way of doing this varies between platforms, but in most cases it is easy and instant.

When your order is executed, money will go out of your trading account and you will have ownership of a number of shares.

FAQs

Why should I invest in shares?

Share investing has the potential to enable you to grow your wealth – although there is always a risk of your investment going down in value.

When you invest in shares, you get the right to share in the profits of that company. When the company makes profits and declares dividends, you get your due as an income. Dividends are a return on your investment.

You can also speculate on share price movements. This means buying when share prices are low or are predicted to go up and selling at the right time when prices have exceeded your buying price, or before the prices are sliding down. In this type of trading, timing your entry (buying) and exit (selling) makes all the difference. But even experienced traders can get the timing wrong.

What are the best shares for beginners?

There is no such thing as a ‘best share’ for beginners or for anyone else.

Which shares are right for you depends on the following factors:

• Your investment objectives. E.g. Do you want to actively trade in shares or hold them as long-term investments, or a mix of both?
• Your appetite for risk. Are you a risk seeker or averse to risk?
• How much are you willing to lose, if share prices dip way below your buying price?
• Your investing preferences, industry and sector wise.
• Are you into ethical businesses or other such preferences?

If all that sounds too complicated, you may want to consider investing in ETFs or low-cost index funds. They let you invest in shares and help diversify your share portfolio without spending a lot of money. They are managed by professional investment managers who analyse company performance.

Another alternative is to begin investing in blue chip stocks. Blue chip companies are well-known, established companies with a strong history of performance. They often pay dividends and belong in the category of share in which you invest and forget. They will continue to pay dividends without any other action on your part.

What should I look for before I invest in shares?

Those who are interested in investing for the long term should look at:

• Past financial performance in terms of profitability, revenue growth, dividend growth, and ratio of market price to earnings. Most basic analyses will include this information and a lot more.
• Industry outlook – a key factor driving share prices.
• Business achievements and various financial and business ratios, which demonstrate the stability of a company.
• Business and industry trends and prospects – keep watching for news about the company and its industry.
• Annual reports of companies, to discover their plans as well as what happened in the last financial period.

How do I choose which shares to buy?

Ask yourself these questions to get a good idea about the companies you are considering investing in:

• Are the goods and services provided by the company going to be in demand in the future?
• What opportunities are there for company growth and expansion?
• Which companies are competing with this company and how strong are they relative to this company?
• Are share prices of the company rising or dropping in the stock exchange, and if so, why?

You can find answers to these questions and other information in each company's annual report. You may also want to check out annual, quarterly and half-yearly financial statements, which are submitted to the ASX and made available to the general public. You can access annual reports on each company's website or on the ASX website

Also, use analysis tools. Most trading platforms and brokers offer a wide variety of analytical tools. Explore them and learn how they work. You can also learn about the various analytical tools in the ASX site.

Can I buy shares without a broker?

Retail investors need to use a traditional broker or an online share trading platform if they want to invest in shares listed on the ASX and other stock exchanges.

Check the list of share trading platforms on Finty, and read reviews of some of these platforms in the Guides section at the foot of the page.

Can I buy shares in US companies in Australia?

You can use international trading platforms to buy and sell shares of US companies listed in the New York Stock Exchange and the NASDAQ, including:

• eToro
• SelfWealth
• Superhero
• Stake
• CommSec
• CMC Markets
• Sharesies
• Uphold
• IG

The verdict

Getting into share investing and share trading is easy enough and can be quite exciting, but always remember that share prices are volatile and can go down very quickly.

To actually grow your wealth with shares requires some work on your part. Each share investment requires learning about the company and doing your own research and due diligence. There are many websites and online platforms that let you learn more about different shares and share investing.

You can learn the basics of investing and share investing at these sites:

• The Australian Stock Exchange education centre and investors’ pages have many resources including online seminars.
• MoneySmart.gov.au has a section on share investing.
• The Australian Shareholders' Association also offers resources.

And you can research brokers’ online platforms right here at Finty.