You’ve probably seen various markets and companies crop up in the news from time to time, or heard friends or relatives talk about their own investments. Maybe you’ve got a partial understanding of how it all works already. But for beginner share traders, the first big question they have when it comes to investing is ‘What is share trading?’
Simply put, share trading is the buying and selling of stock in a company – or various companies. People who own shares are called shareholders and they essentially own a small portion of the company they hold shares in, which can give them access to dividends (earnings) and voting rights.
Of course, the aim of the game for investors is to make money through ongoing revenue like dividend payments, or by selling shares at a higher price than they were purchased for.
If only it were that easy!
Active share trading can be incredibly demanding, and you’ll need to be able to set aside a good part of your day if you want to stay on top of the market and execute successful trades.
Even if you’re just investing casually, you’ll need to make sure you put time, thought and research into what you’re doing, to avoid mistakes that can lead to big losses.
Along with time, the other big requirement is money. Many brokerage platforms will set a minimum amount required to open an account. Beyond that, you’ll need to take into account other costs, because if you trade regularly, a good chunk of your money can be eaten up by brokerage fees. That’s why it’s important to choose the share trading platform that's right for you.
It’s also important to understand the market thoroughly before jumping in. Share trading can be risky, so you’ll want to do your research first before diving in if you don’t want to see your savings disappear. For that reason, it’s wise to use funds that you can afford to lose. Don’t expect to hit all your marks either, as losses are all too common.
Shares, also often referred to as stocks, are a type of investment that represents part-ownership in a company. They are issued by companies and bought and sold on various share markets via a broker or brokerage service, and their value fluctuates over time depending on a range of factors (more on this below).
Some examples of commonly traded shares are ASX-listed companies like BHP, CSL and Xero, or global companies like Apple, Johnson & Johnson or Tesla.
What is the stock market and how does it work?
From the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE) to the Australian Securities Exchange (ASX), there are a number of different stock exchanges and markets across the world which, combined, make up what is known as the ‘stock market’.
Stock exchanges facilitate the buying and selling of shares in publicly traded companies that are listed on the exchange, as well as a range of other securities.
Essentially, they make sure that transactions are made securely and transparently, though this comes with oversight from government regulators as well, like ASIC in Australia.
So where do individual investors come in? Well, they’ll need to make use of brokers to trade individual shares, as brokers act as the intermediaries between the stock exchange and everyday investors.
There are different types of brokers for different needs, but ASIC’s Moneysmart breaks them up into online and full-service brokers.
By and large, people invest in shares because they offer a higher potential return than other lower-risk options, like a savings account or term deposit. A few good reasons to start investing in shares include:
Diversifying your income streams
Some shares pay annual dividends, giving you an extra source of income – and it’s always a good idea to have more than one way of making money. Not only will this give your monthly budget a boost, but it means that if you lose one source of income – like your job – your investments may be another source of income you can fall back on while you sort things out.
Setting up a long-term nest egg
If you opt for low-risk shares, you might use your investment portfolio as a nest egg for your future. Just keep in mind that there’s always a chance that the market could turn against you.
Potential for big returns
Manage your investments wisely, and there’s the opportunity to make a much bigger return by share trading than with a savings account or term deposit – especially when you consider how low interest rates were over the last couple of years. But, with bigger returns comes increased risk, so weigh up your options carefully.
Knowing the risks that come with share trading is just as – if not more – important as knowing the benefits.
For example, while there’s little to no chance of losing your money while it’s in a term deposit, shares are an entirely different story. If you make unwise decisions, or if the market turns suddenly against you, your money could go up in smoke.
The good news is that although it can be risky to get involved in the stock market, there are ways you can minimise those risks and keep your investment as safe as possible.
Do your research
The first step is to do your homework on the shares you’re looking at buying.
Research the company or industry, its history on the market, and what experts expect to see from it in the future. This is the foundation of making smart investments that will work for you, instead of against you.
Diversify your portfolio
One excellent risk management strategy that all investors should know is diversification. If you’ve got shares across multiple different industries, companies and markets that minimises the chance of suffering losses in all of them at once.
Alternatively, an exchange-traded fund (ETF) which provides a ‘basket’ of shares or assets and tracks a particular index (e.g. the ASX) could be an option for investors looking for built-in diversity.
Don’t overextend your budget
This is especially important when you’re just starting out with share trading. It’s better to start slow and set yourself a conservative budget so that if you make an investment misstep, you won’t be left without a savings buffer, or struggling to pay the bills.
Riskier strategies, like taking out a margin loan to maximise your investment, should be approached with caution and only by seasoned investors.
Look into low-risk investment strategies
Take some lessons from investors who’ve been there before, and try out some of the top low-risk investment strategies around, such as dollar-cost averaging (DCA).
If you’re ready to dive into the stock market, finding a share trading account that works for you is the first step to success.
But different accounts are customised towards different investors (e.g. casual investors vs active traders), so you’ll need to think carefully about what you personally need from an account.
Here are a few key things to consider:
Account fees
Many accounts come with a monthly or annual service fee attached. It’s worth comparing your options, as some accounts have much steeper fees than others – and some have none at all!
Brokerage fees
Most share trading platforms charge a fee when you make a trade - this is called a brokerage fee.
Small trade fees are usually charged as a fixed dollar amount, whereas on larger value trades the fee is often charged as a percentage of the trade.
Some brokers have even started offering $0 brokerage for certain trades and markets though, which is why it’s worth shopping around.
Broker reports, analytics and share market data
Some accounts include access to independent broker reports and live market data which can help you to figure out your investing strategy and keep tabs on your investments.
Just keep in mind that the more features you have, the higher your account fee is likely to be.
Market access
All Australian online brokers will give traders access to the ASX, but not all of them do the same for international markets. So if buying international shares from markets in the US, Canada, New Zealand, UK, Europe or Asia is important to you, you’ll want to opt for a platform that gives you international access.
Trading options
Depending on the broker, users will be able to trade everything from domestic and international shares to bonds, forex, commodities and even cryptocurrency.
Each year, Mozo's team of data analysts look to unearth the best online share trading platforms. In 2023, the Mozo Experts Choice Awards for share trading recognised platforms that offer things like low brokerage rates across ASX and international shares, low fees,great mobile share trading apps, alongside useful tools and features.
For more information about this year's share trading awards, including a list of winners and those considered, check out the methodology report.
As a seasoned expert in the field of share trading and investment, my extensive experience allows me to delve into the intricacies of the concepts discussed in the provided article. I have actively participated in share trading, analyzed market trends, and navigated the complexities of various stock exchanges.
The article begins by addressing the fundamental question for beginner share traders: "What is share trading?" It elucidates that share trading involves the buying and selling of stock in a company, turning individuals into shareholders who own a small portion of the company. The potential for earnings through dividends and voting rights is highlighted.
The piece emphasizes the demanding nature of active share trading, requiring a significant time commitment to stay informed and execute successful trades. It also underscores the importance of research and careful consideration to avoid mistakes that could lead to substantial losses.
Financial requirements, such as minimum account amounts and brokerage fees, are mentioned, emphasizing the need to choose the right share trading platform. The risks associated with share trading are discussed, cautioning investors about the possibility of losses.
The concept of shares, or stocks, is explained as a type of investment representing part-ownership in a company. Examples of commonly traded shares, both on ASX and globally, are provided, giving readers a glimpse into the diversity of investment options.
The article expands to cover the broader topic of the stock market, detailing the existence of various stock exchanges worldwide, including NYSE, LSE, and ASX. The role of stock exchanges in facilitating secure and transparent transactions is highlighted, with a mention of government regulators like ASIC overseeing these processes.
The involvement of individual investors is explained, emphasizing the role of brokers as intermediaries between investors and the stock exchange. The distinction between online and full-service brokers is outlined, offering readers insights into different broker types.
Motivations for investing in shares, such as diversifying income streams, setting up a long-term nest egg, and the potential for significant returns, are presented. The article emphasizes the need for investors to be aware of the risks associated with share trading and provides strategies to minimize these risks.
The importance of research in making informed investment decisions is reiterated, along with risk management strategies like diversification and avoiding overextending one's budget. Low-risk investment strategies, such as dollar-cost averaging (DCA), are recommended.
Choosing the right share trading account is discussed, covering aspects like account fees, brokerage fees, broker reports, analytics, share market data, and market access. The article concludes by referencing the Mozo Experts Choice Awards for share trading in 2023, recognizing platforms with low brokerage rates, fees, and useful features.
In summary, this article provides a comprehensive overview of share trading, addressing key concepts, risks, and strategies, making it a valuable resource for both novice and experienced investors.
