Understanding and investing in the sharemarket
A crash course for beginners…
Ahhh, we’ve all heard the share success stories. You know someone who knows someone who knows someone who bought shares in a little pharmaceutical start up and now they’re rich. Well, it’s almost never that simple.
So here’s the nuts and bolts of share trading
When you buy shares, you are investing in one specific company. The shares can go up and down in value and you take on the risk that the company is facing.
And, you also receive dividends from the company when it is doing well. When you are a shareholder, you are a part owner, and you are able to vote in a shareholders meeting.
How do I buy and sell shares?
There are a few different ways to buy and sell shares. You should choose how to invest based on your risk profile, your level of comfort with investing, and your overall knowledge of the market.
Understanding how each option works can help you make an educated decision.
Using a Full Service Broker
You can buy shares with the help of your financial advisor. As a broker, he or she will buy the shares for you as part of your overall investment portfolio. When you use a full service broker, you will pay more in fees.
Your full service broker/financial planner will also give advice about the types of stocks to buy and when to sell. If you don’t know much about the stock market, this is a good option.
If you are going with a full service broker/financial planner, you need to be able to trust the advice you are receiving. MoneyLink clients receive comprehensive recommendations from an approved 4-star rated product list to maximise investment potential, portfolio, and grow wealth.
A broker will be able to help you with your entire investment portfolio and can offer more than just shares. If you are interested in diversifying your portfolio and using a variety of investment products, a MoneyLink financial planner can make it easier to do this.
The smaller the transactions generally mean the higher the rate of the fee for the purchase of new shares.
Using an Online Broker
An online broker service usually offers lower fees associated with buying and selling shares. With an online broker, you will sign up for an account and then have the ability to purchase shares through the online service.
You’ll be charged a fee each time your purchase or sell a share through the online service. You can also use the platform to monitor the shares you own and how they are doing in the current market.
This may be a good option if you are confident in managing your risks with the market. You should carefully research each of the companies that you want to invest in, and then follow the earnings reports for each company. You also need to be aware of things like lawsuits and market conditions for each of the companies that you invest in.
You are taking full responsibility for your investment choices when you choose to use an online broker.
Diversifying Your Investment Strategy
It all comes down to your risk profile and your investment strategy. Buying shares in single companies is riskier than buying them in a managed fund, which already spreads the risk for you. You can decrease the risk by spreading your investments across a wide variety of shares. It is like the old adage, “Don’t put all of your eggs in one basket.”
If you put all of your investments into one company and it suddenly drops in value, you could lose a substantial amount of savings and investments.
It’s a good idea to diversify your investments across several different companies. It can be complicated to have single shares in a large number of companies, but you should diversify and determine how much you are willing to risk on each company.
Also, as well as diversifying across several different companies, it’s a good idea to diversify your shares across several different industries. For example, you don’t want all of your investments to be in electronics companies or internet companies. You should have some in utilities, in traditional companies, and in new and emerging technologies.
Often when a company in an industry takes a hit, other companies do as well. Diversifying among the different industries is just as important as diversifying between companies.
Riding it out… market highs and lows
Pay attention to market conditions! If you are worried that a stock is going to decrease in value, consider selling it.
You can make more money by buying low and selling high, but you really need to watch the trends, listen to the news surrounding different companies and then make your decisions. You can’t panic every time that you hear bad news, and you should try to avoid selling when the market is too low.
If you are unsure of when to sell or buy, your MoneyLink financial planner can give you advice and help you not to panic when the market dips. It will dip occasionally, but it does rise over time. If this sounds too intimidating to you, you may want to consider investing in a managed fund instead of in single stocks.
What are Dividends?
This is the good part. When you own stock, the company will pay you dividends based on their earnings. This income is taxable, and you need to be prepared to pay it each year. You’ll receive a notice of your dividend amounts, and whether or not you qualify for a franking discount.
A franking discount occurs when the company has already paid tax on the dividend, which can reduce the amount you owe in taxes on it. In addition to receiving a cash dividend, you may receive additional shares instead. If you are unsure of how to pay and report this, you can contact your accountant.
How do I manage and track my shares?
It’s so important to keep track of the shares you buy. If you lose track of your shares, you may end up losing out on some of the dividends that are owed to you. So if you move, or change your postal address, make sure you keep your share details updated.
When you move, you need to change your address with your broker, and make sure that each company has the correct information on your shares.
If possible, it is better to ride out a down time and hold onto the stock, because it will usually go back up in price. Investing is a great way to grow your money, and in addition to shares you may also want to consider other investment tools, such as managed funds, rental property and annuities.
Your MoneyLink financial planner can help you gain a greater understanding of the share market, and introduce you to the whole new world of share trading. Contact MoneyLink Financial Planning today.
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