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How To Trade Shares

What’s The Difference Between Stocks And Shares?

There is only a minor distinction between shares and stocks, which has been further blurred in the financial markets of today. The words are usually interchangeable and simply refer to the certificates that relate to the ownership of any company. You may well see the two words used in different contexts. For instance, “stock” is used as a general term relating to the overall ownership certificates for any company, and “shares” is normally used when referring to a specific company. The bottom line is that they are really the same thing, with any minor distinction being more related to syntax than financial accuracy.

Companies will issue shares to generate capital and investors buy shares when they believe that they will do well and can share in the success by making a profit. A share itself is simply a reflection of the overall value of any company. As an example, if a company is valued at $200 million, and has issued 100 million shares, then each individual share is worth $2.The value of the shares can obviously go up and down for a variety of reasons.

How Do You Make Money From Shares?

If you pay attention to financial media, you might be under the impression that profiting from shares involves rapid trading, constantly researching on your laptop, and being glued to news about movements in the stock market. However, this type of trading does not suit everyone, and buying shares and holding them can be an equally good option if the company makes a profit.

You will then receive interest and dividends as a one-off, or on a regular basis, throughout the year. Of course, you will also benefit from their increase in value over the longer term, so plan to hold these shares for five years or more, and reap the benefits when you choose to sell. Always select well-run companies that display a strong financial background and shareholder-friendly practices.

8 Golden Rules For Investing

  • The greater the return you are expecting, the higher the risk you will be taking, so be well prepared.
  • Never put all your eggs in one basket. Diversify your investments across different companies, geographies and asset classes, to lower your exposure to risk.
  • Minimise any fees, which can come in the form of commissions, management or advisory fees and taxes.
  • Buy and hold some of your investments over the longer term.
  • Review your portfolio regularly to reassess its performance and the risk factors.
  • Stay informed, updated, and always add to your knowledge about finances and the stock market.
  • Learn how and when to invest in shares and follow a disciplined approach.
  • Don’t be tempted to be influenced by other investors as to when to sell or buy funds. Any investment can be volatile sometimes so do not be reactive.

How To Buy Shares

Companies are listed on a stock exchange after having completed an Initial Public Offering. This process takes it from being a private company to a public one, so you can buy shares in any company listed on any exchange. The most popular and easiest way to sell or buy shares is by using the services of a reputable broker. When they are first put onto the market, you can also buy them via a prospectus or through a managed fund. There are also online ‘share dealing’ platforms where you can buy shares from companies listed on a number of stock exchanges.

In Australia, there are currently five public exchanges, with four of them which directly supervise companies that issue shares on their markets. Chi-X offers the infrastructure to trade shares quoted on ASX but does not actually list or supervise these companies.

  1. Asia Pacific Stock Exchange (APX) – lists growth oriented companies in the Asia-Pacific region.
  2. Australian Securities Exchange (ASX) – Australia’s main securities exchange.
  3. Chi-X – trades in shares already quoted on the ASX.
  4. SIM Venture Securities Exchange (SIM VSE) – lists innovative companies dealing in green technology, energy and bio-science.
  5. Stock Exchange of Australia (NSXA) – lists around 70 smaller companies.

Finding A Good Broker

Even if you have decided which shares you want to buy or trade, you will need to find a reliable broker and set up and fund a trading account. For lower fees, you can choose an online service that only charges you when you buy or sell shares. Alternatively, you can opt for a “full service” broker that can also offer training tools and investment advice. These brokers are required by law to provide justification for any recommendations they make, and to be transparent about any interests they might have in those investment decisions. Always ensure that you research the broker well and that they are regulated by ASIC before depositing any money.

Any fees are usually a percentage of the transaction value, which typically reduces the larger the transaction. Most online brokers also have a minimum fee. Typically, on a transaction of less than $5,000, you would expect a fee of around 2.5%, reducing to around 0.1% for larger trades.

Once you’ve researched and found your broker, you can open a trading account and deposit your money, which needs to be enough to cover any other charges. When you search for the shares, you can normally opt to buy either a number of shares or a monetary value. A price will then be quoted, and once you accept, the shares will show in your portfolio.

How To Hold Shares

You can hold shares for an indefinite period and if you are with a certificated share dealing service, you will be issued with all the paperwork and certificates. The advantages of this method are the shareholder benefits which are available to named shareholders on the company’s register. You will not only receive any company perks, but also company voting rights and annual reports.

However, if you are taking a shorter term view or decide you want to actively trade your shares, then this can be cumbersome. It is then easier to open a ‘nominee account’, which allows you to purchase and own shares without requiring any paperwork. Simply put, you are the legal owner of the shares, but the platform will hold them electronically on your behalf and your name will not be on the relevant company’s share register. Any dividend payments due are then received directly from the broker.

While you are holding shares, you will still have access to your portfolio of holdings, enabling you fast access to valuations and live share prices, so it’s important not to forget about them. Always keep an eye on how they are performing, even though they are longer-term investments.

How To Sell Shares

Selling your shares should be just as simple and fast as buying them. Although each broker’s platform will have different features and work slightly differently, the principle is exactly the same. If you have a nominee account and do not, therefore, hold any certificates, then you must sell your shares via the same broker or platform you bought them from. When you are ready to sell, you will have two options:

  • Sell a number of your shares
  • Sell a monetary value of your shares

If you have opted to sell all your shareholding in a company, then you will need to select the exact number of shares. You will then be given a quoted price for your sale and will have a very short time period to accept or decline. If you accept and have made any profit from the sale, then this money will show immediately in your trading account.

Selecting Your First Shares

The key to any successful share investment or trading is research and strategy. Any investments you choose should be based on both your short and long-term financial goals. This then allows your broker to assist in recommending shares that will be suitable for your portfolio, especially for longer-term investments. If you are planning on regular trading and using a trading platform, then you will need to invest some time and energy in your own research and decision making.

It is often wise for newer investors to trade shares in recognised companies, as they are usually a much lower risk. Some traders also prefer to opt for companies where they are familiar with the industry or business. This gives them an upper hand in understanding how the company is performing and its track record in delivering returns. You can choose well-known shares with a reputation for high dividends, or elect for growth shares with a lower dividend but a huge potential for profit from their share prices.

Whatever strategy you decide upon, you can research the market news, independent broker recommendations and reports. Keeping on top of company announcements, financial reports and new developments will help you to understand business strategies and their forecasted performance. You can then ask more informed questions to your broker and be better equipped to make the right decisions. For more experienced traders, all this information will help to advance your strategy, choose which shares to buy, how they will perform, and when to sell for a healthy profit.