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.
However, you also receive dividends from the company when it is doing well. When you are a share older, you are a part owner, and you can often vote in a shareholders meeting. Often this is merely a formality since the board of directors will make the decisions for the company.
How to Buy and Sell Shares
There are several different ways that you can buy and sell shares. You should choose how to invest based on your comfort level 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. He should be a broker and 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.
However, the full service broker will give advice about the types of stocks to buy and when to sell. If you do not know much about the stock market, this is a good option, because it takes some of the guesswork out of the process.
If you are going with a full service broker, you need to be able to trust the advice that he is giving you. Take the time to interview with several different brokers to make sure you find one that understand your investing strategy and will advise you accordingly and not just to earn commissions.
There are several larger firms that you can work with, and you may be able to find one through the ASX site. You can ask your tax agent or bank if they have a firm that they work with or can recommend as a broker.
A broker will be able to help you with your entire investing portfolio and can offer more than just shares. If you are interested in diversifying your portfolio and using a variety of investment products, a full service broker may make it easier to do this. Just be sure you understand the commissions associated with the fees.
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 can lower the fees associated with buying and selling shares. You will still pay fees, but the cost should be lower than if you went with a full service broker. With an online broker, you will sign up for an account and then have the ability to purchase shares through the online service.
You will be charged a fee each time your purchase or sell a share through the online service. You can 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.
It is a lot to keep up on, and you may want to subscribe to an investing magazine to help you stay abreast of the changes in the marketplace. You are taking full responsibility for your investment choices when you choose to use an online broker.
Other Ways to Buy Shares
You may be able to buy shares during an initial public offering (IPO) or when a company is doing a float. A float is when the company tries to gain additional capital by selling off new shares in their company.
These transactions can be done by sending in an application form and a cheque. It is a simple way to add to your portfolio. If more people apply to own shares than are available, you may not receive all of the shares you requested.
You may also be able to buy shares as an employee of a company. The company usually offers the shares to you at a discounted price, and you may be able to avoid brokerage fees when you do this. This option allows you to invest in the company that you are working for. There may be rules surrounding the purchase, like you need to own the shares for six months before you sell them.
While this is a good option, you do not want to put all of your investments into just one company, and so you should plan on selling at least a portion of the shares, and diversifying your portfolio.
Diversifying Your Investment Strategy
Buying shares in single companies is risker than buying them from 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 may lose nearly all of your savings and investments.
You need 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. You may want to set a dollar limit, or a percentage of your portfolio limit, and when you go beyond that you know that you will need to diversify by choosing a different company to invest some of that money in.
In addition to diversifying across several different companies, you also need to diversify your shares across several different industries. You do not 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 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 Out the Market
It is important to continue to pay attention to market conditions. If you are worried that a stock is going to decrease in value, you may consider selling it.
You can make more money by buying low and selling high. In order to do this, you really need to watch the trends, listen to the news surrounding different companies and then make your decisions based on the news that you hear. You cannot 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, a full service stock broker 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.
When you own stock, the company will be you dividends based on their earnings. This income is taxable, and you need to be prepared to pay it each year. You will receive a notice of the 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 tax agent.
The company that paid you a dividend will send you a report of the dividend that was paid to you throughout the year.
Managing and Tracking Your Shares
It is important that you keep track of the shares that you buy. It is easy to lose track of the shares, and if you do not keep your address updated, you may end up losing out on some of the dividends that are owed to you.
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. You should also understand that the market goes up and down and you should not panic during down times. This is when many people lose money because they bought high and sell low.
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. You need to have a firm understanding of the market, and the ability to keep a calm head if you want to invest without the advice that you can get from a full service broker. Investing is the best 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.
These will help round out your entire portfolio.