Shares and money in Australia
There are many ways you can invest in shares. Each method has pros and cons. Decide which best suits your needs. Shares may also be referred to as stocks, securities or equities.
Buying individual shares directly
You can buy individual shares through a full service broker, an online trading account or from the company itself when it offers shares through a public float. You have control over the shares you buy and sell. However you must be prepared to put in the time and effort to track their performance and watch the market to make your own buy or sell decisions. For more information, see how to buy and sell shares.
Buying shares via a Listed Investment Company (LIC)
A listed investment company uses money from investors like you to invest in a range of companies and other assets. It pays you dividends from its earnings and hopefully its shares increase in value over time. They have lower ongoing costs than managed funds (Unit Trusts) but are less suitable if you are investing small amounts regularly, due to the stock broking fees on each contribution. An LIC’s share price may not exactly reflect the value of its investments.
Buying shares via an Exchange Traded Fund (ETF)
An Exchange Traded Fund (ETF) invests in a basket of shares that make up an index e.g. the ASX200 Index. An ETF allows you to diversify your portfolio without having a large amount of money to invest. You can buy or sell ETFs just like any other share. They generally have lower ongoing costs than managed funds. But they are less suitable if you are investing small amounts regularly, due to a stock broking fee on each contribution.
Warning
Leveraged ETFs are more complex than regular ETFs and are generally only suitable for experienced investors. They are much more volatile, and are not designed for long-term investing.
Buying shares via an index managed fund
An index managed fund is a type of managed fund that buys shares to mirror a particular share market index. For example, an Australian shares index fund invests in a wide range of companies and property trusts listed on the ASX and aims to match the return of the ASX300 index. You gain a diversified portfolio and pay lower management fees than an active managed fund.
Buying shares via an active managed fund
When you invest in a managed fund, your money is pooled together with those of other investors. A professional fund manager then buys shares and other assets on your behalf and tries to outperform the market. This is a convenient way to buy shares where someone else is responsible for the buy and sell decisions, but watch out for the fees charged by the fund manager.
Buying shares is a good way to build your wealth over time. As with other investment options, shares are not without their risks. Think carefully about your options and seek financial advicebefore you enter the share market.
Once you work out what shares you want, buying them is easy. The most common way of buying shares is on the share market using a broker. You can also buy shares through a prospectus when they are first put on the market. Another way is to buy shares indirectly through a managed fund.
1) Find a broker
Brokers charge a brokerage fee for their service. This fee can range from a flat fee to a percentage of the share price. How much you pay your broker depends on what service they provide.
Online trading accounts
If you are looking for the lowest possible fees, then you should look at an online trading account. The fee to buy or sell a parcel of shares starts from around $30. They charge you only when you buy or sell a share.
Full service brokers
A full service broker will charge more but they can also give you advice on what to buy and sell. The law requires brokers to have a reasonable basis for any recommendation they make to you. They must also tell you about any interests they have in investment decisions which they recommend to you.
Brokerage fees are usually based on a percentage of the value of the purchase or sale. The percentage typically reduces as the amount of the transaction gets bigger. Most brokers have a minimum fee which they charge. Typically, the fee on a transaction of up to $5,000 will be 2.5%. For large trades, it may only be 0.1%. Small trades worth a few thousand dollars can therefore be relatively expensive.
Use the Australian Securities Exchange find a broker tool to help you find a broker that suits your needs.
2) Buying shares in a float
Companies may decide to offer new shares to the market as a way of raising capital. This is called a ‘float’ or an ‘initial public offering’ (IPO). You don't actually need a broker to buy shares in a float. All you do is send the application form in the prospectus and your cheque to the company.
Many popular floats are oversubscribed, which means you may get only a proportion of the shares you applied for, or in some cases, no shares at all. Keep this in mind when sending off your application cheque, because your money can be tied up for a couple of months before you will get a refund. For more information, see prospectuses.
3) Buying shares via a managed fund
You can buy shares indirectly by buying units in a managed share fund. For more information, see choosing a managed fund.
Invest in shares only if you are happy with your understanding of the stock market and are prepared to research and manage your portfolio on a regular basis. Otherwise, you should ask for financial advice and assistance.
Last update: April 2011