Summary
Investing in the stock market is seen by some as a viable alternative to other common investments for many reasons, including a climate of low interest rates and the ease and ubiquity of online stock trading platforms. Like most things, putting money in the stock market is not for everyone. However, for those interested in investing some of their spare money in the stock market, there are some general rules and tips for starting your share market adventure.
Content
Investing in the stock market is seen by some as a viable alternative to other common investments for many reasons, including a climate of low interest rates and the ease and ubiquity of online stock trading platforms.
Like most things, putting money in the stock market is not for everyone. However, for those interested in investing some of their spare money in the stock market, there are some general rules and tips for starting your share market adventure.
Before deciding what shares to invest in or even how much money to start investing with, one needs to read and gain at least some basic information about the stock market, online brokers, fees and the types of companies that are publicly listed. In particular, interested investors should make themselves familiar the major differences between stock market investing and other, more common investments such as term deposits.
There is no general rule of thumb as to the minimum amount of money a person should use to make their first stock market investment. Investors should only invest an amount they feel comfortable with, but should also remember that smaller investments will yield smaller returns and risk being offset by brokerage fees.
Brokerage fees differ depending on the online broker, but generally range from between $9.95 and $29.95 per transaction worth less than $10,000. That means for any purchase of shares worth less than $10,000, one has to pay an extra fee of $9.95 – $29.95 (for more complex trades, such as conditional orders, stop loss etc., there are often further brokerage fees payable) . For someone who decides to buy only $1,000 worth of shares, the brokerage fee is significant as the investor would need to make more than two to three per cent on their investment just to offset the brokerage fee (this is ignoring any other distributions such as dividends).
Most entities listed on the stock market are individual companies ranging from small companies and start-ups, to large well-known companies often worth billions of dollars, known as ‘blue chips’. Blue chips, examples of which are companies like Telstra, Rio Tinto and Commonwealth Bank, are traditionally seen as the most viable investments due to their status, consistent profits and large market share.
However, single companies are not the only entities listed on the ASX – various Exchange-Traded Funds (ETFs) can also be bought and sold on the stock market. ETFs, such as Vanguard, track the largest companies on the stock market (between 50 and 300 depending on the fund), giving an investor instant diversification but a more limited chance at gaining a higher return than the market.
There are also a growing number of Listed Investment Companies (LICs) on the stock market, which also offers instant diversification, but less so than an ETF. Many LICs, such as Argo Investments and AFIC, invest in 20-30 ASX-listed blue chip companies, which allows for strong performance and consistent dividends. However, there are other LICs that invest purely in penny stocks or a mixture of penny stock and blue chip companies.
Sources
http://www.fool.com.au/2011/01/01/step-7-the-dirty-little-secret-of-managed-funds/
http://www.fool.com.au/2011/07/08/how-to-invest-500-1000-and-more/
http://www.asx.com.au/documents/resources/getting_started_in_shares.pdf