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Share market - basics for beginners

Stock market, basics for beginners

Shares investing can be confusing but there is really no need to be intimidated. Here’s a basic guide to help beginner investors navigate their way through the share market.

Investing in the share market is an intimidating prospect for beginners because of the high risks involved, but it can be financially rewarding.

The important thing before actually jumping in the share market, however, is to be equipped with basic knowledge to understand the complex language of the share market.

Share market terms defined

Shares: refers to equally divided portions of an entity’s stock or equity.

Shares are issued by companies when they need to raise finances, and investors who purchase them become part-owners of the issuing company. A shareholder is entitled to vote on important business matters and receive a portion of the company’s profits, but these depend on the type of share purchased.

Dividend: a term that refers to the money shareholders receive from the issuing company. Dividends are paid out from the company’s profits, and entitles shareholders to a sum equivalent to the number of shares they own.

Companies are not required to pay out dividends and those that do may stop at any time, which is why investors should understand that they shouldn’t expect regular dividend payouts.

Investors should be aware the two terms below to determine when they are eligible to receive dividends. These are:

  • Cum Dividend: the date when the issuing company announces that it is in the process of preparing to pay out dividends by a certain cut-off date.
  • Ex-dividend: this refers to the cut-off date that determines who will receive dividends. Shareholders must be aware of the rules below:
    • Companies only pay dividends to qualified shareholders on the ex-dividend date. This means if a shareholder sells their shares before ex-dividend, they may not receive the dividend payout if ownership was officially transferred by ex-dividend. In this case, the new owner receives dividends.
    • A shareholder who buys shares after ex-dividend are not entitled to dividends even if it has yet to be paid out. This is because the previous shareholder would still have been listed as the owner by cut-off, especially since it typically takes 3 days before change of ownership is officially recognised. In this scenario, the previous owner receives dividends.

Liquidity: this is determined by how easy or difficult a share can be converted to cash. Investors should consider liquidity, especially when buying large volumes of shares, because this could determine loss or gain when the time comes to sell them.

Limit order: A limit order allows investors to provide a specific price in which a trade may be executed. When a limit order is called for, a broker would only trade an investor’s shares if the seller’s price matches the buyer’s offer.

A buyer who puts up a limit order may purchase shares for cheaper than the price they determined but not above it, while sellers may trade for a higher price but not below their nominated price.

Market to limit order: Unlike limit order, a market to limit order allows traders to set the quantity of shares rather than the price. The idea is for the broker to find the number of shares an investor wishes to purchase or sell at the best available price.

Settlement: This refers to when buyers and sellers wrap-up a trade based on an agreed price.

Execute: Refers to the act of following-through with an agreed settlement. This requires the buying and selling parties to have their brokers close the purchase and/or sale of shares.

Initial Public Offering (IPO): An IPO is a private company’s first step towards becoming a publicly traded company. This is when they seek approval from the Australian Securities and Investments Commission (ASIC) to become a listed company. This is also when they begin issuing shares to offer investment banks and the public.

What is a share market?

The share market is a system that deals with the trading of equities issued by publicly listed companies. There are physical buildings participants go to when trading shares, such as the Australian Securities Exchange (ASX) in Sydney, but the actual share market is mostly a virtual marketplace where brokers and investors come together to trade.

The share market is composed of the primary and secondary markets, but while they both deal with trading company shares, their function and actual participants differ. Here’s why:

Primary Market: Institutions or companies first issue securities to raise finances during an Initial Public Offering (IPO). These go through the primary market first, where the participants are investment banks and big-time investors.

Most of the trading public don’t get their hands on shares through an IPO because most transactions require millions of dollars. Instead, the smaller players trade in the secondary market.

Secondary Market: Once the IPO is over and the big players have claimed their portion of the issued shares, the remaining or repackaged shares are offered to the trading public in the secondary market where shares are traded in smaller volumes.

How to participate in the share market

An investor may buy and sell shares in the share market, but they must go through stockbrokers to make it happen. This is because only participants are allowed to trade in the market.

There are two categories of stock brokers, and the fees they charge depends on the type of work they do for their clients. These are:

  • Advisory broker: availing the services of an advisory broker means paying them for full-service, such as providing professional advice based on the client’s investment strategy and the investment climate.

    Beginner investors could benefit from the full range of services advisory brokers offer, but it must be pointed out that their services cost higher.
  • Non-advisory broker: Those who trade online may think they do it alone, but the truth is that the trades are executed by non-advisory stockbrokers. These brokers charge lower fees because their actions are, and they do not make any recommendations.

    Intermediate to expert investors, as well as confident beginners, may opt to employ the services of non-advisory brokers.

 Anyone can trade shares in the market as long as their brokers are under the supervision of ASIC and ASX. There is no standard brokerage fee per transaction, so it is best to shop around to find one whose fees won’t eat up their clients’ investment.

How do investors lose money on shares?

Losing money on shares depends on the issuing company’s performance and the shareholders’ decision based on market trends.

The value of shares always increase or decrease, and the stock market can be bullish one year and bearish the next—it’s a cycle investors should expect.

It is important to remember that shares ownership is not a buy-and-forget type of investment, so potential investors may want to rethink their options if they don’t want to play an active role.

How to get started in the share market?

There is no definitive way to investing in shares, but it is highly advised that all investors’ first step should be proper research.

Research, research and more research

Not all investors have the same tolerance for risk so it is important to know one’s limits. Investors may prepare themselves by researching on the following things:

  • Investment risks
    Investors should research on the risks of the company shares under consideration and determine how much risk they can accept. Beginners can do this by reading the company issued prospectus and financial reports, and setting up exit points in their chosen investments.

    An investor may also determine how much risk is involved by researching a company’s historical performance, current and planned project, as well as any changes within the corporate structure. It may be a lot of work but it is better than paying brokers to purchase shares that may not even be within the investment strategy.
  • Brokers who can understand and cater to the client’s preferred investment strategy
    ASIC has a list of brokers a potential investor may contact to begin investing in shares. It is important to speak to a few of them and discuss possible investment strategies, as well as learn about their services and fees. Investors may also compare different brokers to determine what services they will opt to pay for and if the deal is good enough.

  • Investment personality
    It’s important for investors to be aware of their investment personality, but they don’t have to lose money in wrong investments to discover it.

    ASIC has a free ‘Sharemarket Game’ available to the public so potential investors can try their hand at investing in shares without losing real money. Beginners can play this game to determine how good their investment strategy is and find out if there is a need to tweak it.

    Schools may even educate students on the share market and how to invest with the ‘Schools Game’.

Set limits

It’s important to set limits, especially for beginner investors. Traders should know how much they are prepared to pay and how many shares are available for purchase at their nominated price.

Popular shares like blue chips are usually more expensive, so investors should decide whether they are prepared to purchase a smaller volume of shares than if they buy cheaper ones.

Remember that buying and selling shares may be done at limit order or market to limit order so determine which one would work best for each trade.

Keep track of the market

Keeping track doesn’t mean poring over all media to see how the market is moving everyday, but it is important to know just how well (or badly) an investor’s chosen company shares are performing.

Investors should simply keep their eyes and ears open for any red flags and act accordingly.

Keep on learning

There are many free guides and seminars on the internet that can help busy individuals learn more about the share market. Participating in the educational discussions could help beginners tighten their strategies and learn more about the market from industry professionals.

If potential investors are not prepared to take on the responsibility of managing their shares, however, a managed fund may be more suitable.

 

This information has been sourced from ASX and ASIC's Moneysmart.

Share market - basics for beginners
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