How trading and investing in shares works
Buying shares, securities, stocks, or equities essentially makes a trader a part-owner of a particular company. As a shareholder, a buyer can receive dividends and other benefits depending on the type of company they invest in and the kind of stock they purchase.
Traders have the option of owning shares themselves or pooling their funds with other investors through a managed fund – otherwise a type of collective investment.
Learn about stocks and the financial markets
Before an individual can start trading stocks, it is vital that they educate themselves about key financial concepts. This includes things such as learning about the financial markets, stock trading strategies, and investment principles. Traders should also learn about the various types of stocks available, market trends that they can take advantage of, and other factors that influence the price of stocks.
Choose an online trading platform
Another important step is picking the right broker and online trading platform. This is because a broker is a middleman that facilitates transactions between traders, sellers and buyers, and grants people access to the financial markets. That said, currently there are thousands of brokerage firms out there, and not all of them are created the same. Here are a few of their differences:
Online brokerage services
Traders have the option of opening up an online trading account to make their own investment and trading decisions. As everything is done by the trader themselves, fees tend to be lower. Most traders generally pay a fee each time they buy or sell shares online. That said, the kind of fee (if they even pay any) will depend on the specific brokerage firm they work with.
The broker instead does the trading for their clients, and they can advise their clients on what to buy or sell. Fees usually make up a percentage of the value of a trade. Usually, the larger the transaction, the lower the percentage a trader has to pay.
Register for an account
Once a trader has picked a particular broker to work with, they will have to fill out the application and register a trading account. Only then will they have access to the stock market and other financial instruments. The account application process varies from broker to broker. That said, there are still a few common steps. These include providing identification documents (such as a valid passport or government identity card) or proof of address (such as a utility bill) and other relevant information. After the application is approved, a trader will then be given login details to access their trading account.
Pick the stocks to trade
Once a trader has created an online trading account, now is the time to start researching stocks that match their trading goals. Even better, a few brokerage firms will give traders access to a wide range of markets and data and may even provide trading analysis and recommendations so that traders can make better-informed decisions. Traders are highly recommended to conduct research on stocks they are interested in. This means taking a look at financial reports, industry trends, company performance, and market conditions that will decide what types of stocks to invest in.
Place an order
Once a trader has done their research, they can start placing their trades. Now, traders need to pick whether they want to buy or sell stocks based on their analysis and market outlook. To execute a trade, traders generally have the enter the stock symbol on the trading platform, as well as the quantity, and type of order (a market order or limit order) through their broker.
Market order: This is where a trader is looking to buy a share immediately at the best price that is currently available.
Limit order: Placing a limit order allows traders to set a maximum purchase price for their buy order. When and if that price becomes available within the specified time frame, only will the trade be executed.
Monitor the instrument’s performance
After executing a trade, traders will have to monitor its performance as well as their stock portfolio on a regular basis. It is best they keep track of their investment’s performance, review their trading strategy from time to time, and be prepared to adjust their positions if anything unexpected occurs in the market.
That said, the frequency with which a trader monitors their investments will depend on their trading strategy. For instance, if they have a long-term investment strategy, traders might only check and see how their shares are performing every month. On the other hand, if they have a medium-term strategy, they may want to check their investments every week instead.
Practice risk management
There is no doubt that stock trading – or anything involving the financial markets – comes with risks. No matter how experienced or seasoned a trader is, risk is something they cannot avoid. As such, it is crucial for traders to implement and use risk management strategies. This can take the form of setting stop-loss orders to limit potential losses or avoid investing in more than they can afford to lose.
Stay informed and up-to-date
It is also recommended that traders stay up-to-date on the latest financial news, economic indicators, and market trends. This is because all of these elements can wind up affecting the financial markets, and therefore their investments. Traders should also take the time out to brush up on any educational materials, such as new trading strategies or how to protect themselves from risk in the financial market. Traders can also learn from the success and failures of their peers, and how to avoid such things happening to them. As such, continuous learning and staying informed will help traders to make better trading decisions in the long run, and they are less likely to incur large losses.
Things to keep in mind include the health of the Australian economy, reserve bank interest rate decisions, levels of investor confidence, exchange rates, government policy changes, and the performance of share markets in Australia as well as overseas. All of these can impact when and what a trader invests in.
Comply with tax regulations
Traders must also understand the tax implications of stock trading activities in Australia. If they are confused or unsure about this step, then it is best they consult with a tax professional to ensure they comply with the relevant tax regulations and reporting requirements.
Other small tips to keep in mind when trading in Australia
If a trader wishes to learn and get more out of stock trading in Australia, below are a few extra tips to keep in mind:
Begin with blue chip companies: Blue chip companies are some of the safest options for anyone beginning stock trading. These tend to be Australia’s top 50 companies, and they are usually listed on the S&P 500 and ASX 50. As a result, these companies are often considered pretty well-established. As such, they often offer the best chance for minimising a trader’s risk and providing potential steady returns in the long run.
Diversify: If a trader is looking to minimise their exposure to risk, a great way to do so is to diversify their portfolio across a range of various industries and sectors. If they buy shares over many industries instead of just sticking to one or two, they can be better protected against losses if one particular sector does not do so well.
Buy what you know: Rather than simply diving into the deep end when beginning to trade, it is best for traders to invest in companies or industries that they have some background knowledge of. Once they become more experienced, then they may decide whether or not they want to invest in companies that are slightly more obscure.
On the whole, traders must remember that stock trading involves some level of risk, and past performance does not necessarily indicate future results. As such, traders should trade within their risk tolerance levels and strive to meet their investment goals. If a trader is still unsure about trading in the stock market, it is best they consult with a financial advisor as they can offer guidance on investment strategies and what to do in the market.