The share market can be intimidating to a new investor. Understanding the basics will help you get started with confidence.

What’s a share? How do I purchase one?

A single share is a unit of ownership within a corporation.

The Australian Securities Exchange, also known as the stock exchange or stock market, is home to companies such as the Commonwealth Bank of Australia and Rio Tinto. More than 2,000 companies, including some of the biggest names in the world, are listed on ASX.

When you purchase shares of one of these businesses, you own a part of the business, even if it is a very small number.

To buy or sell shares, you will need to hire a broker.

How do I earn money by investing in shares?

Investors aim to earn money by investing in shares either through one or both of the following methods:

• An increased share price: Also known as “capital growth” or “capital gain”, this means that you earn money when you buy your shares at a lower price and sell them at a higher one. It’s also important to keep in mind that you will lose money if you sell your shares for less than the price you paid.
• Share in company profits: These payments, known as dividends, are a share of profits that is paid to shareholders twice a year. Dividends are not mandatory, but they’re often seen as a good way to return earnings to shareholders.

Why is my money better off in savings?

Savings accounts and term deposits are less risky investments, so it’s generally recommended that you keep some money in them.

Investing in stocks can yield a better return on your money than leaving it in a savings account.

First steps

You can avoid making irrational investment decisions by focusing on the reasons you wish to invest. Ask yourself these key questions:

• How long would you like to invest in the stock market?
• How much money are you planning to invest?
• Will you make regular contributions to the fund?

How can you learn about investing?

You can gain confidence faster if you begin to acquire the necessary knowledge as soon as possible.

MoneySmart, the website of the Australian government, recommends that you educate yourself on the economy, interest rate, exchange rate, and government policies, as well as how they may impact a company’s success.

To build your confidence in investing, you can get bite-sized tips and learning. To get started, search “Investing Hub” in the. On its website, the ASX has an education section for share investors.

How many do you require?

The majority of brokers will require that the initial trade be $500, which the broker refers to as a minimum parcel of marketable shares. Brokers can decide on the size of subsequent increments and purchases.

ASX recommends that you “start your investment in shares with at least $2,000”. This is a guideline. Understanding the costs will help you determine how much to invest.

CommSec Pocket lets you invest as little as $50 into 10 themed ETFs, including the 200 largest companies. CommSec Aussie Shares provides access to more than 2,000 Australian ETFs and shares. The first investment is $500, and subsequent investments are $100.

Start small

Each transaction involving the purchase or sale of shares is subject to a brokerage charge in addition to the share price. The less you invest, the higher the brokerage fees will be as a percentage of your investment.

As an example:

• If you pay $5 for brokerage and invest $600 in shares, the brokerage represents just under 0.8% of your investment.
• If you spend $19.95 on brokerage and invest $5,000 in shares, the brokerage represents 0.4% of your investment.

If you have a small investment, you may need to invest in a company that has a much higher rate of return than the average to be able to cover your expenses, let alone make a profit when you sell your shares.

It’s also important to know that shares are the most risky type of investment. The more you invest, the more you expose your savings to this risk. When you invest in shares, you need to accept the possibility of losing money.

How do you decide which shares to purchase?

There are many tips and suggestions to help you with the process of choosing and researching companies.

MoneySmart recommends starting with businesses in an industry you are familiar with. This will make it easier to determine a company’s performance.

What should you look out for?

Although past financial performance can be an important indicator of a firm’s stability, it is its future outlook that drives share prices.

MoneySmart recommends asking questions like:

• Will goods and services provided by this company be in demand in future?
• Is there room for growth in the company?
• What are the company’s competitors, and how strong are they?

You can find useful information by consulting sources such as a company’s annual report, financial statements for each year and half-year, or even its quarterly results. You can find these by searching the ASX site for the company’s name.

Cheap and unpleasing

Cheap shares don’t always represent good value for money.

Penny stocks, such as those that cost 10-20 cents per share, might seem cheap, but a company with a poor track record can wipe out all your money quickly.

If you have $1,000 and buy 5,000 shares, it doesn’t necessarily mean that this is a better deal than buying 15 or 20 shares worth $60 each. When it comes to making a profit, what matters is not the number of shares you have but how much they increase in value.

Also, be wary of buying shares simply because they are dropping in price. Share prices may be falling because a company has announced a downgrade in profits or that its financial situation has changed.

You can get a better idea of the share value by looking at historical share charts. If the share price of a company has fallen over time, it is likely to be a risky investment.

Why is my body not rising quickly enough?

A rapid and significant increase in the share price can also cause concern.

The share price usually rises when an announcement is made about the future of a company, such as a new contract, a forecasted profit or a projected sales.

If the value of the shares increases too rapidly and the company fails to meet its expectations, prices may fall as the shares are less desired.

Price is important, but only one factor to consider when selecting shares.

What is your maximum loss?

MoneySmart says that your share market performance is as dependent on your decisions about selling as it is on those about buying.

Set yourself a “percentage-stop” of about 15% for each company in which you purchase shares. Decide how much money of the original investment you’re willing to risk. You will sell the shares if the share price of a company falls below that amount. If you don’t, the losses from one company could wipe out all your gains.

What’s next?

Search for “Investment hub” and browse market news, or start your investment journey by logging in and searching.