How to Buy Shares
Buying stocks for the first time can be an exciting yet daunting experience. There are many new concepts which can be difficult to understand if you have not been exposed to investment markets. But don’t worry – read on for all the information you need to get started.
If you are new to investing it is important you understanding the risks associated with the asset class. There are multiple articles available which discuss these risk and ways to minimize their effects. However for the purpose of this article we will assume you are aware of the associated risks and are ready to start investing!
How to buy shares
Effectively there are only two ways to invest in shares. You can by shares in a company when it floats on the Australian Stock Exchange or you can purchase stock in a publicly listed company via the market. (Special circumstances exist where you can purchase shares off-market but for the purpose of this article we will on explore the two above mention scenarios.)
Buying shares in a float
When a company sells shares and lists on the Australian Stock Exchange (ASX) it is called a ‘float’. The shares in the company are offered to the general public via an Initial Public Offering (IPO).
The company prepares a legal document know as a ‘prospectus’ which contains relevant information about the company. The prospectus includes information such as the nature of the business, past financial results, the company’s history, future plans, and any inherent risks of the business. This document is very important and should be studied carefully before investing in any float.
There are several floats on the ASX each month however many of these are small mineral exploratory businesses or start up mining ventures. These IPOs are small in market capitalization and most are outright speculative punts for investors due to the lack of credible information on the companies. The opposite to these IPOs are the large scale floats like that of Myer or Telstra. At the time of the float these were well known and established businesses and are considered blue chip investments.
A minor consideration about investing in a float is that there is no brokerage payable on the investment. However this should not be seen as an important factor in any decision to invest in an IPO.
Buying shares on the market
A majority of share trades are made ‘at market’ on the ASX, in fact several billion dollars worth of trades take place every trading session. To purchase share via the share market you will need a stock broker.
When you buy shares at the market, you are not purchasing shares directly from the company in question, you are purchasing shares from another party. A stock broker is used to facilitate the trade. So in other terms, for you to be able to purchase a share, someone else needs to be selling the same stock. However as discussed earlier shares are very liquid, with 1000s of shares in blue chip companies changing hands every minute.
Shares listed on the ASX need to be trade through a stockbroking firm. The stockbroker is responsible for facilitating the trade. Naturally they charge a fee for this service know as ‘brokerage’. Brokerage for share transactions is dependent on the broker in question and is an important deciding factor when selecting a broker.
To operate as a stockbroker in Australia, you need to by licensed by the Australian Securities and Investments Commission (ASIC). To ensure the validity of your chosen broker you should check that your broker is licensed by ASIC.
Trades can be made over the phone with your broker or you may opt to use an online trading facility. You will normally have to setup a trading account with a broker before they will execute trades for you. Setting up an account is a fairly straight forward affair and may take a few minutes or no more than a few days depending on the trading facility or broker.
Most brokers, especially those online, will also need your bank account details so that funds can be transferred to and from your account as trades settle. As discussed earlier brokerage charged by brokers varies significantly. For example the brokerage charged by online trading accounts is usually cheaper as trades settle automatically to online cash accounts and the process is automated. Brokers who operate by phone or fax and don’t require accounts to be established with linked banks accounts will generally charge steeper brokerage.
Order Types
More to come…
Settlement
More to come…