So, you’re yet to take your first cautious steps into the world of trading. You’ve been saving your money and reading articles for a while but rather than clarify your initial course of action you’re more confused than ever.
What do I do first? How much money do I need? Is now a good time to start? What are the risks? How much time will it take?
These are all good questions.
A lot of people know they want to get involved with trading the sharemarket, but they don’t really know how to get started. This article will take you through everything you need to know about buying shares in Australia.
I’m going to walk you step-by-step through the basics of getting set up as a trader. Read this and you’ll harness the skills required to hit the ground running when it comes to trading the sharemarket.
The Australian share market has a total value of approximately $1.5 trillion and with a daily turnover of $4.5 billion it is one of the world’s top 10 exchanges. Possessing such size enables investors to invest in world-class companies that range from some of the world’s biggest miners, to banks, to world leading media companies.
Australia investors are in an enviable position as we are the first major financial market to open each day, followed by Asia, then Europe and finally the US. This enables local investors to get a jump on overseas markets with regard to taking advantage of new investment ideas.
Buying shares is a simple and easy process and is open to anyone with the only restriction being that you must be 18 years of age. Minors cannot directly own shares and traditionally a trust structure is used to allow shares to be held on behalf of a minor. You can find out more about this here.
The march of technology means that anyone anywhere in the world can purchase shares in Australian listed companies. Foreign resident investors generally do this by opening an account with an international broker such as Interactive brokers.
The world’s millionaires know that investing in the stock market is essential. Let’s slash your learning curve and develop the foundation to trade the market like a professional.
So, Why Trade Instead of Invest:
- Traders make money regardless of market direction, whereas investors rely on a sustained uptrend over time.
- Investors don’t receive some of the tax benefits that traders can take advantage of.
- By taking a more active role in your own financial future, you’ll gain control. No-one will care as much about your money as you do.
Share trading is traditionally the first form of equity investing most traders become involved in. When purchasing a share you are in essence buying a stake in the underlying company – as such your investment is subject to the volatility that equity markets experience. However it is this volatility that affords traders the opportunity to generate higher returns than they would elsewhere.
Traders need to be in charge of their own financial decisions. Place your emphasis on educating yourself to make informed decisions – rather than relying on brokers, economists, or financial planners.
As a best-selling author of 4 books on the sharemarket, my approach to trading is ‘technical’ which means that I use computerised technical analysis tools to in essence make a decision as to whether the bulls or bears are in charge. Then I work out whether we should be buyers or sellers.
Due to the technical nature of our trading we don’t utilise ‘fundamental’ information such as company reports, balance sheets and the like. These are too subjective and are prone to interpretation and that they are based upon a misunderstanding of the nature of trading.
How to Buy Shares in Australia – Step by Step
Step 1 – Save Your Trading capital (money to invest)
You may have seen those ads for investing in property where you can buy with “no money down”. Well, that’s not going to work here. You’ll need some capital behind you to get started. The most conservative way to get a ‘trading float’ together is through old-fashioned saving. Don’t underestimate the power of saving as a wealth creation tool – just don’t make it your only wealth creation tool.
A question I regularly hear is ‘How much money do I need to get started?’ I think what is really being asked here is ‘How little can I start with?’
The problem with starting with a small amount of money is that your ongoing costs, e.g. brokerage etc. will cut into your profitability much more than if you have a larger amount of capital.
For example, if you purchase a parcel of shares worth $3,000 your brokerage could be $19.95 (online brokerage rate) to buy and another $19.95 to sell. This represents 1.3% of your total trade value in costs. But if your parcel of shares was $20,000 your costs in and out would only represent 0.25% of your total trade value ($24.95 buy and $24.95 sell).
This may not seem like much, but if you are turning over a lot of trades it all adds up.
Other costs such as guaranteed stop-loss orders are often also set fees regardless of trade size.
Another problem with a small amount of capital is you are restricted as to how many positions (parcels of shares) you can hold. This, in turn, makes managing your risk more difficult.
So to begin trading with, say, $10,000 is actually more difficult than beginning with $50,000 or $100,000. “But I’ve only got $3,000 saved.” Well, wait until you’ve saved up some more. In the meantime you can educate yourself so you’ll be in-the-know when you’ve got a decent stake together.
Step 2: Write a Trading Plan
I was watching a bit of late night TV and there was this show called Dragons’ Den. The premise is that several entrepreneurs (or wannabes) pitch their business ideas to five wealthy investors to gain financial investment in exchange for a stake in their fledgling companies.
As I watched, a distinct pattern emerged. Those who had a hobby or interest they thought they should be making money from fronted up asking for financial help but most often had flimsy, pie-in-the-sky figures, no research and a lightweight business plan. They were usually sent packing as each ‘dragon’ scoffed at their idea and lack of preparation.
Then there were the (fewer) true entrepreneurs who had a solid business idea, a well thought out business and marketing plan, robust research and a sound grasp of their finances. In almost every case where this was demonstrated one or more of the wealthy investors took a stake in the enterprise.
If you want to be successful as a trader you will need to have a written trading plan.
By mapping out what you want to achieve and the procedures you will follow to get there, you will, over time, produce greater profits than losses.
Your plan should include things such as your goals and objectives, your trading system and procedures and how you will measure your performance.
What will you do when you go on holidays? What accounting structure will you trade under? How will you handle a windfall profit? All of this needs to go in your trading plan.
Once you have a plan, you then need to follow it. This is probably the most difficult part of the process and I’ll leave trading psychology to another time.
Step 3: Get Charting Software & Data
Before jumping in with your first buy order, you’ll need some way to analyse and search for trading opportunities. There are generally two types of analysis you can employ – fundamental and technical.
Fundamental analysis involves looking at announcements, company balance sheets and profit/loss details. Technical analysis involves reviewing actual share price and volume data on a chart of the stock’s price history to determine the likely direction of subsequent share price action.
I am an advocate of technical analysis. I usually ignore all fundamental analysis as it is unclear what actual effect the often subjective fundamental information will have on the share price. Also fundamental data is notoriously difficult, if not impossible, to quantify when comparing different stocks.
Technical analysis, on the other hand, relies on looking at what is actually happening now and can give insight into the market psychology that is occurring.
To scan the market for buying and selling opportunities from a technical point of view you will need a charting program for your computer and a source of share price data.
Step 4: Find a broker
To buy and sell shares, you’ll need a broker. There are two types of stock broker – full service and discount. I prefer using a discount broker which usually means you can do your trades online without talking to a human. It’s also much cheaper – full service brokers can charge 3 or 4 times the brokerage fees of an online discount broker.
Being able to trade without talking to a human broker also avoids you having to hear their opinion about the actions you are taking and therefore affecting your own psychology.
Before online broking was available, my broker was on strict instructions from me to take my buy or sell orders without making any other comments about my trading choices. Mentally, I tried to imagine him as an order-taking robot. With cool lasers for eyes…
Step 5: Make your choice
Once you’ve analysed the market using either fundamental or technical analysis, you’ll work out the shares you want to buy. Most traders choose individual shares, and they have an account with their favourite broker. Also, work out how much money to place into the trade.
Most private share owners in Australia own shares in just one or two stocks. Putting all your eggs in one basket is never a good idea. You should diversify (to a point) and spread your capital across a range of stocks from different market sectors. But not so many that you begin to mirror the performance of the overall market. Spreading your money across too many stocks will also increase the level of brokerage fees you pay and be a nightmare to monitor.
When deciding how to use your capital efficiently there are several models from which to choose.
The equal-portions model is where you simply divide your capital into even amounts. For example you might have $100,000 capital and decide to split it into 10 even parcels of $10,000 each.
This is a simplistic approach in that it assumes that all stocks are created equal. Trust me, buying $10,000 of NAB shares is very different to putting $10,000 into a speculative mining company that is still drilling for samples.
The market capitalisation model compares the size of listed companies based on, you guessed it, their market capitalisation. Take a company’s number of shares that have been issued and multiply that by the share price to get the market capitalisation.
The All Ordinaries Index, for example, is made up of stocks over a certain market capitalisation. Many fund managers and institutions also use this factor to determine whether to include stocks in their portfolios.
You also could take this into account by allocating, say, 50% of your money to the top 100 stocks (top 100 by market capitalisation – lower risk), 35% to the next 200 stocks and 15%of your capital to the rest of the market.
If you wanted to have 10 positions overall you could then buy, say, 3 positions of $16,666 in the top 100 portfolio, 3 of $11,666 in the next 200 portfolio and the last 15% with 3 stocks of $5,000 each.
Step 6: Place your Order
In placing your order there are a few steps that you will need to go through. You will first have to log into your brokers site using your secure details.
When you first log into the site you will be greeted by a generic home page such as the one below. These pages generally give you a run down on market activity and provide you with links to videos and news releases.
Once you have logged in you will then need to place your order. The first step is to bring up a quote screen for the share you want to buy. In the example below I have brought up the screen for BHP and the first thing it shows you the current price of BHP. Below this price quote is some more information that includes the current bid and offer prices, the high of the day, the low of the day, the volume traded, the number of trades, the value of these trades, the open price and the previous close.
Below this you will see what is known as market depth – these are the buy and sell orders currently in the market. Market depth is only relevant if you are trading a large quantity in an illiquid share and you want to make certain you can get your order away. Or in shorter-term traders who ride short-term changes in sentiment.
Once you have decided to place you order you will need to click the BUY button. When you do this you will be taken to a screen like the one below.
Within the order ticket as these screens are sometimes referred to are some important pieces of information.
The code for the share will be automatically filled in from the previous screen.
The Quantity box gives me two alternatives. I can either enter the number of shares I want to buy or I can select a Value that I want to buy. In this example I have entered the quantity as 100 shares
I am able to select a Price Limit for my purchase so I can make certain I know exactly my entry price. Alternatively I can simply purchase my shares At Market. At market means that I will simply be matched against the first seller in the queue and the order will be done instantly with no regard to what price it is done at. In this example I have selected At Market.
I can also set the Expiry for the order – so I can set a date at which I want the order cancelled. Or I can choose for the order to be simply Good for Day. This means if my order is not filled on the day I place it then it is cancelled when the market closes. Note neither of these options applies if your order is at market.
Once you have completed your order you will be given an Order Estimate, which gives you a rundown of the cost of your order including brokerage.
Once you have placed your order you will receive via email a contract note that will detail all the elements of your purchase.
Step 7: Keep Good Records
You’ll need to keep a record of your trading activities. You could use something as simple as a spreadsheet program on your computer or an off-the-shelf record keeping program such as Trade Trakker.
Having good record keeping lets you know where you stand at any given moment and also helps your accountant at year end work out your situation with regards to tax.
Step 8: Follow your Stop loss
It has been said by many successful traders that the rules of trading are:
- Cut short your losses
- Let you profits run
- Keep your position sizes small
The most ignored rule is cutting your losses short.
Most people don’t set a stop loss, or if they do, they ignore it. “Oh, I’ll just give it one more day” they say and when the trade has turned into a nasty loss, instead of closing it like a mature adult, they throw it in the bottom drawer and rename it ‘a long-term investment’.
Set a stop loss and stick to it. Your stop loss should be set before you even place you buy order. You can set a stop loss using a variety of methods such as percentage drawdown, pattern recognition or by using a volatility-based stop. Many of Louise Bedford’s trading resources outline in detail how to choose the best stop loss method for you.
Your stop loss acts to keep your loss small if a trade goes against you from the start. It also helps retain any profits you may have in an existing trade. As the share price rises, move your stop loss point up to position just under the latest share price action and when the trend reverses your stop will be hit and you can exit with the majority of your profits retained.
Step 9: Give your records to your Accountant
Trading is not just about how much money you make – it’s about how much you keep.
When you become a trader, your business is to buy, hold and sell stock. There are many different market instruments you can trade such as shares, options, CFDs, forex and commodities. You’ll need to find an accountant who understands the tax implications of the activities you are undertaking.
Trust me, there are plenty of accountants who don’t understand how a trading business works.
For example, there are specific tax implications associated with whether you define your trading activities as coming under the banner of being an investor or being a trader.
Your accountant also needs to have a positive attitude to trading. Having an accountant who is cynical about what you’re doing can damage your mindset.
Do your research and find someone who can help.
Step 10: Review your own Psychology
As traders become more experienced they generally move their focus from the details of what and when to buy to the subject of psychology.
Trading will often make you come face-to-face with your inadequacies. Your flaws will be highlighted and your strengths will be minimised. It’s at these times you need to have some background in trading psychology so you can work your way through the inevitable challenges.
The aim is to trade in an unemotional manner. Letting your emotions control your trading decisions will have you ignoring your trading rules as set down in your trading plan. Some people justify this sloppy approach and claim to be trading by ‘gut-feel’. This doesn’t work. Ever.
Admit when you are wrong about a trade – the market is much bigger than you. Learn from your past mistakes, adjust your plan and continue. If you are still unsure what is going on, consult a more experienced trader. There are plenty of books available on trading psychology which you should include as part of your trading education.
Consistency is the key to long-term success in the markets. Often people have a trading plan that is fundamentally sound but they second guess themselves and deviate away from their rules.
Having a good grasp of your mindset can also help you establish a productive work/life balance, and let’s face it, isn’t that what we’re all trying to achieve?
So, Let’s Get Started
The best way to learn how to trade effectively is to get started with a small position. You’ll learn more by being involved than you ever will by just sitting on the side-lines.
Because you’re keen on learning how to buy shares in Australia, you need to continue educating yourself about how the markets work. I suggest you register now for the weekly free trading advice podcast called Talking Trading. It features expert Australian trading information and interviews to fuel your profits, squash your fears and drive you towards exceptional trading habits. The show is run for Australians by Australians, so everything you hear will be 100% relevant.
When you’re ready to really take your trading to the next level, you should check out The Mentor Program run by Chris Tate and Louise Bedford. This is a 6-month, repeat for free course about how to trade shares in Australia, but it will also equip you to trade every instrument, over every time frame.