The Share market - A Learners Guide (Part 1)
I was recently asked "How do you get started as in investor in the Share market". That question has many similarities to that old saying about ways to skin the proverbial cat.
The Share market is a large, complicated and sometimes daunting field. There are over 2500 stocks listed on the Australian Stock Exchange, and every stock has different investment features. For the budding investor it can all look a bit overwhelming. The stock market (known as the ASX) has its own language (words like >tic or ticker codes=, >dividends= >fundamentals=, >market risk=, >momentum= - to name just a few), and it features many myths and horror stories (remember >Poseidon= >Bond Corp= >One Tel=?). And everyone seems to have a sure fire red hot stock tip - even your taxi driver.
If investing in the stock market and getting a reasonable return on your money was easy, everyone would be doing it and we would all be millionaires.
The Australian stock market is still one of the best ways to invest money. $10,000 invested in the Australian stock market in 1987 (30 years ago) would be worth around $135,000 in 2017 - an annual rate of return averaging over 9% (source: fidelity.com.au). Much better than any bank term deposit.
If you are a mum and dad investor, are retired and trying to live on your savings, or trying to run your own Self Managed Superannuation Fund (SMSF) - this is the type of return you would be hoping for.
However gains on the stock market are neither smooth nor predictable. The stock market (and individual stocks) goes up and down from day to day, week to week and month to month. However, overall it has a long history of going up, as long as you have the patience and nerve to ride the bumps. Putting your investment in the bank is safe and predictable, but the returns in recent years have been very poor. During the global financial crisis, however, you would have been much better off with your money in the bank.
The stock market has setbacks from time to time, and overall lost money in eight of the last thirty-five years. Only once (2008) was the loss bigger than 10%. Every other year the Australian stock market went up for the year, and on thirteen occasions the stock market went up by 10% or more in the year (source: thetradinggame.com.au).
If you do it well, investing in the stock exchange is a fairly reliable and profitable way to watch your money grow. But, yes, it can look fairly daunting.
So let us see if we can break it down into some more manageable portions.
There are essentially four different ways to invest in the Australian stock market. Which you choose will depend on your personal circumstances, how much time you are prepared to spend learning about and monitoring your investments, how much control you want in the investment decisions, and your level of interest in current affairs and the state of the economy (which affect the share market).
For simplicity, lets imagine that there are four doors into the stock-market.
The first door requires very little time, little decision making, and no investment experience, skills or knowledge. You just give the job to an expert - a financial advisor or investment service that specialises in the Share market investing - and pay them to do all the work. There are a number of specialist financial advisors who cater for mum and dad investors and small family SMSF=s. These services have specialised skills and knowledge and often many years of experience in share market investing. They do all the heavy lifting, you sit back and count the money.
However there can be some down sides, not least of which is that you are placing your money in someone's hands and hoping they make wise and profitable investment decisions on your behalf. Another down side can be the cost of this service. Make sure you ask lots of questions to make sure you know what your are, and are not, getting for your money. The Federal Government Australian Securities and Investment Commission (ASIC) website has some great tips on how and where to find a reputable financial or investment advisor (https://www.moneysmart.gov.au/investing/financial‑advice/choosing‑a‑financial‑ adviser).
The second door into the stock-market requires a bit more work by you, and more time, but is often much cheaper. This step involves joining an investment or financial service that does all the research which it publishes (usually online) for all its subscribers, leaving you to make the investment decisions and monitor the investment. They don't tell you which stocks to buy, when to buy them, or do any of the paperwork. That is your job. There are some excellent online services that employ a team of specialists who research a wide range of stocks on the stock-market, provide a detailed analysis of each one, have yardsticks to measure performance, and make their recommendations using well-established research methods. Their research is constantly updated and you pay for the service usually by an annual/periodic subscription fee to access their website and/or software. Most "do-it-yourself investors" (door 4, see below) use one or more of these services to provide at least some of the research they need to make investment decisions. If you do a search for >share advice= on Google you will find most of the well-known share market research services. Again it helps to do your research on each service before you buy. Ask your investment friends, or come along to the South Coast Australian Shareholders Association meeting and talk to fellow investors about the services they subscribe to.
The third door into the stock-market involves a bit more research, a bit more time and gives you a lot more control over your money. This step involves buying shares in investment or managed funds. There are hundreds of these available. These businesses research and buy a large parcel of shares in a wide variety of businesses listed on the stock exchange, and manage these shares - collect dividends, do all the paperwork, and make decisions on when to buy and when to sell. Some of these managed funds are listed on the stock exchange (e.g. Argo Investments, Australian Foundation Investments, Clime Capital etc. etc.) and are known as Listed Investment Companies (or LIC=s) - do a search on the ASX website to find a full list (http://www.asx.com.au/products/etf/managed‑funds‑etp‑product‑list.htm), or on the Morningstar website (www.morningstar.com.au/LICs) , while other managed funds can be found through a financial advisor or