Shares aren’t the only way to invest – far from it – but they are what come to mind for many of us when we think of investing. Here’s an overview of how they work and some of your options for purchasing them.
- What is a share?
- How can I buy shares?
- How much does it cost to buy shares?
- 5 questions to ask yourself before you start investing
What is a share?
A share, sometimes called a stock or security, is a unit of ownership in a company. If you buy shares in a company, you own part or a ‘share’ of that company. This part ownership is sometimes referred to as having equity in that company.
As a shareholder, you generally have certain entitlements, such as receiving a portion of any profit the company may decide to pass on to investors in the form of dividends. Depending on the kind of shares you own, you may also be eligible to attend and vote at the company’s annual general meeting (AGM).
Shareholders also assume some risk in the company’s performance. It’s important to remember the value of a share can fall to zero, in which case you would lose all of your investment.
Ordinary versus preference shares
There are two main types of shares – ordinary and preference. Both mean a shareholder owns a part of a company, but they function in slightly different ways and give different rights to their holders. For example, according to the Australian Securities Exchange (ASX), preference shares usually give investors a priority or ‘preference’ over ordinary shareholders when dividends are being paid or when it comes to who receives money back if the company is wound up. Preference shareholders typically have limited voting rights in certain situations, depending on the conditions of their shares.
How can I buy shares?
To buy shares in a company, you typically need to go through an intermediary known as a broker, such as an online share trading platform. You can also choose to invest in the share market indirectly through a fund, such as a managed fund or an exchange traded fund (ETF).
Most shares are bought and sold ‘in-market’ meaning investors buy and sell from one another rather than from the company who issued the shares initially. In some situations, however, investors can buy direct from the company – for example, when the company ‘goes public’ and lists its shares on the stock exchange in what’s called an initial public offering (IPO), or if it chooses to raise more money from investors by issuing more shares down the track. This is called capital raising.
Another potential way to acquire shares is if you work for a publicly-listed company and it offers shares to its employees, sometimes at a discount, or in some cases, as a bonus linked to performance.
Let’s take a closer look at some of the most common options for buying shares.
How can I buy shares using an online share trading account?
One of the more popular ways to invest in shares is to set up an account with an online share trading platform. This is a brokerage service which allows investors to deposit cash into their account and then use those funds to purchase shares, usually via the provider’s website or app.
To buy shares, you need to submit an order through the brokerage service and a broker will purchase the shares on your behalf at the best available price at that time, unless you specify a maximum price at which you are prepared to buy. This is known as a limit order.
Generally, $500 is the minimum single transaction amount that’s possible with online share trading platforms, but this can vary depending on the provider you use.
These platforms typically offer additional support to investors, such as data and insights on the market. They may be suited to ‘DIY’ investors who are comfortable choosing their own investments and simply need a platform to facilitate the buying and selling, with some supporting features for managing the account.
Canstar compares and rates a range of online share trading platforms in Australia.
If you’re comparing Online Share Trading companies, the comparison table below displays some of the companies available on Canstar’s database with links to the company’s website. The information displayed is based on an average of 6 trades per month. Please note the table is sorted by Star Rating (highest to lowest) followed by provider name (alphabetical). Use Canstar’s Online Share Trading comparison selector to view a wider range of Online Share Trading companies.
How can I buy shares using a full-service broker?
If you want to buy shares, but would like more support and advice along the way, you could opt to use a full-service broker. In addition to facilitating the transactions, this kind of broker may offer advice on which companies to invest in and how to build a portfolio of shares and other assets. They may also be able to offer advice on related areas such as retirement planning and tax.
While full-service brokers typically offer a broader range of services than online share trading platforms, they are generally a more expensive option.
How can I buy shares using an investment fund?
If you do not want to purchase shares in specific companies and instead want to invest in a range of stocks with a single trade, you could choose to go with an investment fund. If you buy into a fund with other investors, you generally own investment ‘units’ rather than individual shares, although you could still potentially earn dividends from the underlying shares the fund has chosen to invest in. The fund generally holds voting rights with the companies and may cast ‘proxy’ votes at AGMs on behalf of individual investors.
Examples of investment funds include managed funds and ETFs. Some funds simply aim to replicate the returns of the market overall, or a particular ‘index’ such as the S&P/ASX 200, which is the 200 largest publicly-listed companies in Australia. These are known as index funds.
You can buy into an investment fund directly through the fund manager (generally for larger investment amounts) or if the fund is listed on the stock market (an ETF), you may be able to buy into it via an online share trading account.
How can I buy shares through micro-investing?
If your aim is to buy into shares by investing small amounts regularly, you may be interested in the micro-investing platforms available in Australia, such as CommSec Pocket, Raiz Invest and Spaceship Voyager. These platforms allow you to invest in shares using very small amounts, some even by allowing you to round up the value of purchases, such as rounding up your $4.50 coffee to $5 and investing the $0.50 difference. With micro-investing, you are generally investing into a pool of shares, such as an ETF, rather than buying individual shares.
Because of the low value of the trades typically made through micro-investing platforms, it’s a good idea to watch out for the fees charged, as your costs can end up making up a high percentage of the value of your investments.
How can I buy shares through super?
You can generally invest in shares through your super. If you have funds saved in super, chances are some of it is already invested in the share market via one of your fund’s standard investment options.
Generally, ‘growth’ investment options invest a larger proportion of a member’s investments into Australian and international shares than other asset classes, like property or bonds. Shares can be more volatile as the value can go up and down fairly regularly.
Depending on the fund, you may also have the option of choosing a more ‘hands on’ investment option, potentially allowing you to allocate more of your super to shares. Some funds may also offer their members the ability to invest in particular ASX-listed companies directly. In some cases, funds may charge higher fees for this service.
Another option, if you want to invest your super in the shares of particular companies, is to set up a self-managed super fund (SMSF), which typically offers greater flexibility and control to investors compared to what’s on offer via an industry or retail super fund. Bear in mind that managing your own super is a big commitment, can involve significant set-up and ongoing costs and would require you to follow strict regulations for managing the fund.
Before making any changes to how your super is invested, it may be wise to get professional financial advice to ensure you are aware of any risks and possible long-term implications of adapting your strategy. Some super funds offer financial advice to members at no additional cost, as it is generally included in the other fees you pay to the fund.
→ Related: Independent financial advisers in Australia
Can I buy shares without a broker?
In some cases, you may be able to buy shares without going through a broker. Some examples include buying into a managed fund or investing in shares through your super, or purchasing shares directly from the company issuing them through an IPO. If you already own shares, you may be offered the option to purchase additional shares in a company if it chooses to raise extra capital. This is known as a share purchase plan (SPP).
How much does it cost to buy shares?
In most situations, there is a cost for buying and selling shares, which depends on the method you use and potentially the value of the transaction too. Fees can have a big impact on the returns you may be able to get from investing, so they are an important consideration. Some common fees you may encounter include brokerage fees and fund management fees.
A brokerage fee is charged by a provider in return for facilitating investment trades. It is commonly charged as a flat rate for smaller transactions and as a percentage fee for larger ones.
As a hypothetical example, you might pay $10 per transaction when buying or selling shares up to the value of $1,000, $20 for trades valued between $1,000 and $10,000 and a fee of 0.2% when the value of the trade is above $10,000. If you are regularly trading low amounts (e.g., via a micro-investing platform), flat dollar fees per trade can represent a significant chunk of your investment.
You can compare the brokerage fees charged by the online share trading platforms on Canstar’s database using our comparison tables. Bear in mind that some online share trading platforms also charge a regular account keeping fee, regardless of how frequently you trade.
Canstar’s Online Share Trading Star Ratings and Awards assess brokers based on their fees and the features offered as part of the service.
Full service brokers generally charge additional fees depending on the services provided, over and above the transaction costs.
If you invest via a fund, you will typically be charged a regular management fee in return for the manager running the fund. This fee is usually a per annum percentage of your investment balance.
At the time of writing, based on the managed funds on Canstar’s database investing in shares, the management fees charged by funds can vary significantly, so it can be a good idea to shop around based on fees and other factors.
If you invest in an ETF through an online share trading platform, you will generally still be charged a management fee by the ETF provider, in addition to the brokerage fee.
Other fees charged by managed funds can include performance fees if the investment returns exceed a certain level, contribution fees when you top up your investment or fees for financial advice provided. Managed funds also generally charge transaction fees when an investor buys or sells units in the fund, often referred to as the buy/sell spread.
5 questions to ask yourself before you start investing
There’s a lot to think about before you commit to investing in shares. Here are five key questions to consider that may help you to work out what strategy is best for you.
1. Should you invest in shares directly or indirectly?
“It all depends on how much you have to invest, both in dollar terms and time, and how much control you want,” Canstar’s money expert, Effie Zahos says.
“Direct ownership of shares comes with voting rights that can impact the company’s management. You also control when to buy and sell and you decide whether or not you want to increase or decrease the amount of money you have invested in a stock.”
But with more than 2,000 companies listed on the ASX, choosing which shares to invest in is not necessarily straightforward, and a lot of Aussies choose to invest indirectly for the sake of simplicity. Investing in a fund can also be a cost-effective way of diversifying your share portfolio, compared to paying brokerage fees on multiple purchases of individual shares, according to Ms Zahos.
If you want a greater level of control and choose to invest directly, she says it’s important to remember the golden rule that when you buy shares, you are becoming a part owner in the business.
“It can help to think of it this way: If a friend asked you to invest in her business, chances are you’d ask some serious questions like: ‘How will it make money? Who’s running the show? What sort of competition does the business face?’
“It’s no different when it comes to investing in listed companies. You need to ask serious questions to check whether the business has decent growth prospects.”
2. When should you invest in shares, and how often?
When you are ready to start investing in shares, the temptation may be to go all-in with whatever amount you have to invest. Or alternatively, to try and ‘time the market’ so that you are buying when your preferred companies’ shares are going at bargain prices. Ms Zahos says this can be a difficult strategy to execute successfully.
“Timing the market would call for good research, good timing and good luck. I prefer a strategy of drip-feeding my money into my investments evenly over time, which helps me to be somewhat protected, thanks to dollar cost averaging (DCA).”
Ms Zahos says that by adopting this approach, you buy more shares when prices are low and fewer when prices are high.
“The end result? A better average price,” she says.
Keep in mind, however, that while DCA may be an effective way to manage risk, it is still not a risk-free strategy. Sometimes you’ll end up with a lower return than you would have if you’d invested your entire lump sum in one go, such as when the market is steadily rising over time.
3. How often should you check the performance of your shares?
Ms Zahos says this can depend on how you have chosen to invest.
“If you’re investing directly into the share market, you want to make sure you’re across how they’re doing.”
However, she says that the share value of some companies can be more volatile than others, and you may have investments that you are happy to check in on less frequently.
For investors looking for a less hands-on approach, investing via a fund may be appealing.
“The beauty about managed funds is that you’re paying a manager to do the worrying for you,” Ms Zahos explains. “Having said that, it pays to keep on top of your fund manager as key personnel changes could mean someone new is in charge, and could impact the performance of your investment.”
4. Should you invest in companies you like, or keep emotion out of it?
If you’re going to invest in a company, does it make sense to go with brands you’re a fan of, like your favourite restaurant chain, or industries you know a lot about, such as the one you work in?
Ms Zahos says there can be advantages to investing in companies and industries you are familiar with.
“I always like to keep things simple and invest in what I know, and I find it can pay to have an interest in the companies you invest in,” she says.
“This way, you’re probably more up to date with news and events that may impact the company.”
She adds a word of caution, though, explaining that emotions can get in the way when it comes to decisions about buying and selling.
To avoid your judgment becoming clouded, investors may benefit from having some buying and selling rules in place, and sticking to them regardless of the companies involved. An example could be committing to holding onto the shares for the long-term, even if there is short-term volatility.
Each investor and each transaction is different, so the best approach to take will vary on the situation. When deciding on your strategy for picking investments and choosing when to buy and sell, it may help to consult with a qualified financial adviser.
5. Is investing in shares right for me?
Lastly, it may help to consider whether investing in shares is suitable for you, based on your situation.
When done well, share investing can help people to grow their money over the long term, potentially well beyond what might be earned in interest by keeping cash in a bank.
On the flip side, it is generally a riskier approach to take than putting your money in a savings account, and there is the potential that you will lose money. Of course, there are also wider investment options you may like to consider too.
“There is no guarantee that your shares will rise in value and that dividends will be paid,” Ms Zahos says. “If you need your cash fast or you’re saving for a short-term goal, shares may not necessarily be the right investment fit for you.”
If you are looking for a way to ‘try before you buy’ you could consider the ASX Sharemarket Game, which allows prospective investors to ‘invest’ hypothetically and see how their practice stock picks perform based on the real-life performance of the companies. The game usually opens in early February and runs from March to June.
Cover image source: Number1411/Shutterstock.com