Last week I talked about some of the background work you need to do before you buy shares in a company.
Too often I hear people taking tips on companies because a mate or friend said it was a great buy. That’s like taking a tip on a racehorse! You might like a flutter from time to time and going to the races can be fun — but odds are you’ll never win over the long term.
Some people read about a certain share in the newspaper and immediately think that what’s written there is gospel so they go out and buy the share. What they don’t understand is that companies engage in public relations to get articles written about them in these papers, on TV, radio etc. Or they engage in social media. This is purely PR and does serve a purpose but you have to be careful about publicity.
I read newspapers and listen to the financial media all the time but it’s not my main source of research. If you seriously want to make money on the stock market, you must dig deeper into a company yourself, or follow people who you come to trust, and evaluate what they say.
Now having said that, I know people whose tolerance to risk is so low that the mere thought of putting money into a company and see it drop (which can so easily happen in the short term) is just too much to bear. They like the idea of being in the stock market and understand the importance of diversification – not putting all your eggs in one basket (see: diversification) but they just don’t know where to start. Often it’s purely a confidence problem.
Your first foray into the share market can be daunting and I’m not going to downplay that, especially with all the warnings I give about being careful, doing your research and not listening to ‘tips’!
There is an easier way for anyone who wants to get more involved with shares but is still a little confused or even fearful of making decisions about what and when to buy.
This is when an exchange traded fund might be of interest, even to kick off your journey into stocks as you build up your confidence. In our podcast this week, Camilla Love, Founder & Managing Director of eInvest, talks about this way of buying stocks. Camilla has had a long and successful career in the finance sector and is a good role model for anyone wanting to work in this sector so I urge you to listen to this podcast. Because she mentions ETFs, I want to put a bit more emphasis on what this means because you know we want you to always feel that we’re speaking language you understand.
So here I go…
As I said, you could invest in an exchange traded fund or ETF. This is a fund that trades on the stock exchange. That’s why it’s called an exchange traded fund! If you sign up for an online broker like Nabtrade or CommSec, you can buy ETFs just like you could buy BHP or Harvey Norman. Every stock or ETF has a ticker code. CBA’s is CBA and BHP’s is BHP. Others have tricky tickers because their company name is longer or some other company got the ticker code that might suit a new company because it was on the stock market earlier.
An easy way to play stocks is to play the whole market, and there is an ETF that gives you the top 200 companies or shares on the Australian Stock Exchange. You simply tell your online broker you want to buy, say, 500 units of the ETF with a ticker code such as IOZ or A200 and in one trade or purchase, you’ve invested in the top 200 companies in Australia!
If you invested in IOZ five years ago, you would’ve bought in at $22.06. The unit price is now $25.35, which is a gain of $3.29 or 15% or 3% a year. But IOZ has paid a dividend of at least 4.5%, so the gain would be 7.5% a year! And that’s despite the Coronavirus crash of the stock market in March this year, which took the IOZ unit price down from $29.18 to a low of $20.01!
By the way, there are lots of different ETFs that might specialise in a sector or market. You can invest in ETFs called GOLD, ROBO and HACK (this last one lumps together the stocks of companies that specialise in cyber security!) ETFs can be a good way to play the stock market. But remember, the more exotic the ETF often means the bigger the returns and, therefore, the bigger the risks.
So there you have it but we’ve got lots more learning to do before we go any further than this.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.