Investing your money is the one sure way to build wealth. Investing can be quite confusing to beginners, so here’s a simple walkthrough of exactly how to get started.
This post will act as a pillar for you newbie investors. A guide book of sorts. A step-by-step breakdown of what investing is, how it’s done, and how it will allow you to make money while you sleep (seriously).
Table of Contents
Meet Curious Chris
Chris is currently in year 12. He is completing his HSC, partying on Friday’s, playing sport on Saturday’s and working part-time at the local Maccas.
In May next year, Chris will be turning 18!
His parents have told him that on his birthday, he will be given a check for $5,000. The one rule attached to this present is that he “must invest the entire amount.”
Not knowing what to do Chris comes to Uncle Nathan to read up on how he might go about ‘investing’ this money.
Let’s take a look at Chris’ journey…
Investing for Beginners – What
Put simply, to invest your money means to back an asset that you think will increase in value in the future. Essentially, there are two main facets of investing (that you should worry about for now anyway). These are:
- Investing in Shares
- Investing in Real Estate
Shares
To buy a share means to buy a small portion of a company.
If you were to go to the ASX (Australian Securities Exchange) right now, you’d see hundreds of different companies with their own funny looking graph, a share price and a market capitalisation (the value of the business at the current share price).
Buying shares that trade on the ASX is known as a Secondary Market transaction because your money isn’t going to the company. Instead, your money is going to another investor, who you bought the shares off.
There are lots of different options when investing in shares. Below you will see the two most common options on the ASX and what they mean:
- Ordinary stock in an individual public company
- This is when you buy shares in a single company (such as Apple).
- Ordinary stock in an ETF
- An ETF (Exchange-Traded Fund) is a bundle of shares from multiple different individual businesses that are sold as one share on the ASX.
- To learn more about ETFs, check out this course by Rask Education!
We are going to go into a lot more depth with shares in other posts so don’t worry if it doesn’t make total sense just yet.
Real Estate
Investing in real estate is another super common investment strategy. Investing in real estate is essentially when you buy some form of property (a piece of land, a house, an apartment), with the expectation that it will be worth more in the future. You can also collect rent throughout that time as a more constant form of income.
Investing in real estate often requires much more capital than investing in shares, but the main benefit of real estate is that you get a physical asset (the land or the house or the apartment) rather than just a piece of paper that says you own it (which is what happens with shares).
Investing in real estate essentially means you become a landlord. Being a landlord gives you the ability to charge tenants rent, the responsibility to maintain the property, and the possibility to sell the property in the future (hopefully at a higher price than what you bought it at).
The main forms of real estate investing are:
- Rental Properties
- This is when you purchase a property (such as an apartment) for the sole purpose of renting it out to tenants until you sell the property at a higher price.
- REITs (Real Estate Investment Trusts)
- These are like shares but instead of buying into a company, you buy into real estate.
- REITs allow investors to purchase real estate with a small amount of capital.
One key benefit that real estate investors have over share investors is the ability to use leverage. Leverage is when you take your small amount of money and make it bigger through debt, essentially borrowing money to buy something you can’t yet afford in cash. Leverage allows investors to purchase larger assets, pay them off and then ultimately increase their portfolio size quicker than with regular compounding.
Investing for Beginners – Why
Investing is risky.
Well, more risky than keeping your money in the bank, anyway.
But, with risk in the financial markets, comes a greater potential reward. In a low-interest-rate environment (like the current record lows of 0.1%), investing gives you the chance to earn a much higher return on your money, compared to letting it sit in a bank account.
This allows your money to compound quicker and ultimately grow to a greater value in a much shorter amount of time.
A higher rate of return = more money made while you sleep.
Take this example for instance:
Curious Chris could put his money in either of these two options:
A high-interest savings account with ING Bank that is currently paying 1% interest p.a. (p.a. stands for per annum – per year).
OR
An ASX 200 ETF that has averaged 7% p.a. over the past 40 years.
Let’s weigh up Chris’s options…
Pros | Cons | |
High-Interest Savings Account |
|
|
ASX 200 ETF |
|
|
After 10 years, Chris’s $5,000 would be worth:
In the Bank = $5,526
Invested in Shares = $10,008
That’s the power of compounding! An additional 6% p.a. results in a $4,482 difference…
SO which option should Chris go for?
The answer isn’t so simple. It totally depends on his situation and risk profile.
For instance, if Chris thinks he’ll need the money within the next year or so, it’s probably better to keep the money in a savings account so he can access it whenever he needs to, and to avoid having to take the money out on a day where his balance has declined (which happens in the share market ALL THE TIME, but not with savings accounts).
If Chris doesn’t think he’ll need the money for 5 or so years and is able to keep his emotions away from his investing, then he’s probably better off investing the money in order to watch it grow quickly due to the higher rate of return.
Investing for Beginners – How
Now we’ve arrived at the fun section, making it happen!
Here is your step-by-step guide to investing in Australian shares:
Am I ready to invest?
Before anything else, I want you to find as many different articles and youtube videos about investing as you can. Read them, listen to them, absorb them, think about them… Is investing right for you in your current situation?
I want you to research anything you don’t understand about the above post (learn about key terms and what they mean here) and consider what your current situation is.
- Do you have any debt? If so, pay that off FIRST!
- Do you know what your monthly cost of living is? Bills, food, car, etc.
- Do you know how much you can afford to lose? (This is crucial because there is always a chance in the stock market that the value of your shares decreases).
- Will you need any of the money you are planning on investing within the next 12 months?
If your debt is paid off, your monthly bills are covered, and you don’t need the cash within the next 12 months, keep reading.
Pick a broker
With the spare money you have after obligations (always keep at least 6 months worth of living expenses in your bank account), let’s choose our broker.
Your broker is the connection between the buyer (you) and the market. Your broker will facilitate your transactions through to the ASX, inform the company that you now own and then send you a confirmation of purchase.
The ASX is open for trading between 10:00 am and 4:00 pm Monday to Friday (excluding public holidays), meaning your broker can buy/sell shares for you between those times.
Most brokers are online nowadays, meaning you have access to your account 24/7 and are able to view your cash balance, your portfolio of shares and any public information about the companies you own.
Brokerage firms charge a fee every time you buy or sell shares, so it is important to choose a broker that has a low commission on transactions (no more than $25 on transactions under $10,000).
We’ll take our friend Chris along on this journey so everyone can see exactly how to open an online brokerage account. For demonstrative purposes, we’ll open an account with Commonwealth Bank’s CommSec (this is their brokerage platform and is often the most convenient due to linkages between your CommSec account and ComBank account).
Chris opens up his internet browser and searches “CommSec“. He opens up the CommSec webpage.
Chris then clicks “Join Now”, followed by “Share Trading”
Chris should now click “Get Started”, followed by “Join Now” under the $10.00 account (this is the one that has a + CDIA image).
Then Chris fills out all of the information as it pertains to his situation. Most importantly, Chris chooses to trade with his own money.
Following this, Chris adds in his personal info and then chooses to open a CDIA.
Lastly, Chris checks the Dividend Declaration box, ensures his details are correct, creates a password and then opens his CommSec account.
Finished!
Deposit some cash and choose a stock!
Now we get to the fun (and often scary) part of investing, choosing where to put our money.
The most common place to start is with a simple ETF. This provides you with exposure to the markets at minimal risk due to diversification and quality of the businesses.
My first stock was the ASX 200 ETF offered by iShares (IOZ.ASX). This is a great first option because it allows you to get into the market for as little as $500, it pays a small but handy dividend, and it tracks the top 200 companies listed on the ASX!
The key to investing is this:
Only purchase the stock if you would be willing to own it for the next 10 years, no matter what. That is basically how you should view any major purchase. We often perceive value in a very short-term oriented way and it is important to put your purchases into perspective when evaluating their value.
If you choose to purchase an individual company as your first investment, make sure you do your research! There are tons of helpful resources on the internet that are completely free to learn how to pick individual stocks, but here are some of my favourites:
- The Australian Finance Podcast by Owen Rask and Kate Campbell is great to learn about all things investing and finance
- There are also some amazing free courses on Rask Education
- The Intelligent Investor blog is always a reliable source
- Youtube is always full of helpful information (although, be careful how much of it you believe!)
- I quite like the Investopedia pages, however, they sometimes go into way too much depth.
Basically, before making the commitment, ensure you have done accurate and reliable research, and are prepared to hold that stock through all the ups and downs of the market.
Enrol in the Dividend Reinvestment Program (DRP)
If the business you invested in pays out dividends each year, chances are they will have an optional DRP that you can enrol in.
A DRP is a hands-free way to watch your portfolio compound. Essentially, when the business you are invested in pays out a dividend, they will use your portion of that dividend to purchase more shares (at a price discount!) on your behalf. These are deposited straight into your account for you to see.
The DRP is one of the easiest ways to set up an auto-pilot portfolio because you literally have to do nothing! The company will send you information on how to enrol in their DRP (if they have one) after you buy your initial shares. Follow the instructions and 10 mins later, you’ll be good to sit back and watch that money compound.
Chill the heck out
You’ve done it. You are now officially an investor. Congratulations!
The next step for you is to do absolutely nothing!
I want you to basically forget about those shares, continue living, continue having fun and most importantly don’t get upset when they are in the red (because chances are, they will be in the red at some point).
Don’t check your account every day. Don’t read every single piece of news about the company that you now own. Figure out what news is important and what news is not.
hint: most news is just noise, don’t worry about it!
It is super important here to remain confident. If you did your research and you’re happy with what stock you’ve picked, be confident in it! As long as there are no massive changes, no management mishaps, no global pandemics, you should be pretty safe over the next 10 years.
Sell your shares
I want you to only sell your shares on these conditions:
- The business is heading toward inevitable failure due to a major incident, management change or lawsuit and you have no idea of what its future will look like.
- You are in dire need of the money and cannot put more shifts in at work or sell anything in your bedroom to get that money. Even still I’d only sell the shares that are in the green unless you absolutely HAVE TO.
In other words, you should RARELY need to sell your shares. That defeats the whole purpose!
The Book That Has It All
There’s this one book that I reckon every Aussie needs to read. It’s the perfect book for someone who hates reading because it has lots of illustrations, big writing and simple words.
‘The Barefoot Investor’ by Scott Pape is the pinnacle of personal finance in Australia. He goes through from A-Z and helps you understand your finances in a super-simple, easy-to-read way.
If you’re going to make an investment today, this should be it!
That was a damn long post! If you’re still here, I am so bloody proud of you.
Feel free to leave any comments, questions or concerns below and I’ll get to them ASAP.
Enjoy your new wealth tool,
Uncle N.
The information on this page is for informational and educational purposes ONLY. It does not take into account your personal financial needs, objectives or situation. For specific financial advice, speak to a registered financial advisor.
This post may contain sponsored links from which I may earn a commission. This is at no extra cost to you (the reader) and will not add to the cost of any item should you wish to purchase through these links. As an Amazon Associate, I earn from qualifying purchases.
Comments 2
This is so useful!! Getting into investing can be so overwhelming so I’ll definitely be bookmarking this to come back to. Thanks Nathan!! 🙂
Author
Yeah, investing can be super in-your-face at first. I’m glad the post helped you out… always here for any questions!
Uncle N.