If you said yes to the above, you’re not alone. ASX research shows two key reasons Aussies don’t invest are a lack of confidence and not knowing where to start. So, welcome to Investing 101.
Decide to invest
When it comes to managing your money, you have a few options. You could put it in a savings account, invest in things like real estate or put it into the stock market. A sensible approach could be to do a little bit of everything. Have a bit of money in a transaction account, some in a higher interest savings account for bigger purchases, like property and shares, and then a little in an exchange traded fund (ETF). This strategy diversifies the risk of putting all your money in one place. It also gives you multiple revenue streams that can offset one another in the event of an economic downturn.
The key benefit of investing in the stock market is that it can potentially give you a higher rate of return than a basic savings account. It’s also a long-term strategy for growth. As with all investing, though, there are risks involved, so be sure to do your due diligence before getting started. This is where many people get put off but stay with us here – it’s worth it.
Ask the right questions
It’s a good idea to understand why you want to invest: is it to supplement your super, boost your salary or help you save for a big purchase like a house? Knowing your ‘why’ helps determine your investment strategy, which could be that you hold your shares for a long time or sell when they go up by a certain amount (known as growth investing).
And consider your mindset. Investing for the long term (think years rather than weeks) can help investors feel more comfortable riding the waves of volatility. For example, the early stages of the pandemic in 2020 saw market fluctuations, which stabilised by 2021, allowing those with a longer investment time horizon to ride it out and not feel so stressed about the short-term ups and downs.
Get started
The minimum initial dollar amount to start investing in ASX-listed companies is $500 but the ASX suggests starting with at least $2,000. Another option is to invest using CommSec Pocket ETFs – there are 10 investment options to choose from and you can start with as little as $50. This could be a good option if you still feel a little bit nervous about investing but want to get a feel for it.
Make it a habit
Once you’ve made your first investment, the challenge is to then keep it up. For some, that might mean setting up a small, regular amount you invest. Fortnightly or monthly share purchases – say $50 per month in an ETF – spread your investment over time. Such ‘dollar-cost averaging’ means you don’t buy at highs but over different cycles.
And remember to do research – a checklist may seem obvious but many investors don’t do this. “Take a moment to consider whether you understand what the company you’re investing in does,” says CommSec analyst Steven Daghlian. “If you find it’s too hard to get your head around, perhaps you can take it as a sign to look elsewhere.”
Manage your risk
Risk is an inherent part of investing in the stock market but there are ways to lessen how much you take. Diversifying your portfolio is one. “Share prices can rise and fall in response to a variety of things, such as investor sentiment, company news and changes in the economic environment,” says Daghlian. “Investing across different industries or types of assets can help reduce risk. An ETF might be a good starting point for some, since many already spread investments over a number of stocks.”
Whichever way you go, Daghlian says monitoring your investments is a must. “Always track what your investments are doing, but remember the journey is not overnight but over months, years or decades,” he says. “If you watch prices rise and fall daily, you’re likely to experience waves of optimism and pessimism.” So keep your eyes on the horizon.
Investment terms you should know
Yield
Your return over a period of time. If you receive $5 from an investment of $100 made a year ago, your investment has made a five per cent yield.
Portfolio
Everything you have invested, from cash in the bank to real estate and shares.
Dollar-cost averaging
Buying more shares when prices are low and fewer shares when prices are high to reduce your average cost per share.
ASX
The Australian Securities Exchange is the country’s largest stock exchange – it’s where shares are traded.
Stocks vs shares
These terms are often confused but they’re slightly different terms that convey ownership in a company. Companies release stocks and an individual unit of that stock is a share. Stock refers to the broader concept of ownership in a company, while shares refer to the specific number of units of ownership.
The most common ASX investment options
Shares
An investment into an individual company listed on a stock exchange, like CommBank.
ETPS AND ETFS
Exchange-traded products (ETPs) are a selection of stocks with a common theme or industry – this lets you buy bundles of shares from multiple companies. ETFs are pooled investments that may include shares, bonds, currencies and indexes. They’re bundled and traded in themes like Global 100 and Tech Savvy.
Managed funds
Your money is pooled with other investors’ money and managed by a professional.
Bonds
These are loans from a private lender (you) to a borrower who will invest the money. You’ll get regular dividend payments in return for the loan.