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Cheat Sheet

Share Investing For Dummies (Australian Edition)

Anyone can buy shares, and investing in the sharemarket can grow your wealth better than any other investment. Understanding how the stock market works, researching companies, assessing the risk and using a good broker will help you buy shares wisely and build a rock-solid, diversified share portfolio.

Starting a Share Portfolio

Here’s some advice on how to get started in the sharemarket and what you need to buy shares and build up a solid, diversified share portfolio. Avoid picking stocks at random: Find a good broker, do your research and buy shares that will grow your wealth for you.

  • Your first requirement is some spare money. You don’t need much to get started. You can invest any amount in the sharemarket, but because of the buying costs, the more money you have to invest, the cheaper the brokerage fees.

  • Finding a broker is next. Brokers work for firms that simply take your order and enter it in the market, or firms that take you on as a client and provide advice, research and financial planning to help with your investments. The former is cheaper, but if you think you’ll need advice, the dearer fees of the latter may be money well spent.

  • Decide whether you’re a trader or a long-term investor. As an investor (meaning a long-term buyer of shares), you’re in a safer position for share investment and more likely to succeed. Traders (meaning professionals who buy and sell shares daily) are legitimate investors in the sharemarket, but this kind of activity is only for those who know what they’re doing.

  • Choosing stocks is next. For a long-term investor, 8 to 12 well-chosen stocks will give you a portfolio with far less speculative risk than just 2 or 3 shares. What you buy depends on the return you’re hoping to make, the risks you’re prepared to run, the time frame you’re prepared to invest for, and whether you’ll need to take the money out before then.

  • Research the companies whose shares you buy. Find out what the companies do and how they’ll make money for you. Buying shares you know nothing about on tips from friends or acquaintances (even worse, strangers) is the same as going to a casino. A blue chip at $20 mightn’t look as exciting as a goldmining share at 10 cents. The latter can double much more quickly but it can also reach zero value faster.

  • Don’t look for shortcuts to investing success. Unfortunately, you won’t find a guru or blackbox software tool that can predict which shares will rise and which will fall. If someone tries to sell you a foolproof investment formula, ask yourself — if it really worked, why would they share it with me?

Maintaining Your Shares Investment Portfolio

Investing in shares is a long-term commitment. Although you don’t need to be sitting in front of your computer all day, once you’ve got a well-constructed share portfolio underway, you need to monitor the sharemarket and keep an eye on what’s happening with your stocks.

  • Keep a long-term perspective. Monitor your portfolio to see how your shares are doing. spending hours each day in front of your computer screen looking at your portfolio could tempt you into trading for no sound reason.

  • You never go broke taking a profit. If you believe that one of your shares has risen so far that a fall is imminent, take a profit. You don’t have to sell all of the holding. Take out your original investment and leave all the gain still riding on the share.

  • Don’t panic when the market falls. Occasional falls in the prices of your shares are inevitable; their effects are usually short term. If you’re a long-term investor who is using the sharemarket to build wealth over decades, short-term fluctuations on the sharemarket are irrelevant

  • Don’t worry about capital losses. A capital loss occurs only when you sell your shares. Until then, the loss is only a calculation on paper. If you’re confident in your shares, hang on to them.

  • Don’t let tax considerations determine your strategy. The sole reason for investing in growth assets is to get capital growth. Don’t hang on to profitable shares just to avoid paying capital gains tax. Focus on the pleasing fact that you’ve made a capital gain, not on the tax. If you do sell and take a capital loss, the consolation is that you can use it at tax time to offset against some of your capital gains.

  • You can’t outsmart the market by timing trades in and out of shares. You won’t get it right anywhere near often enough, and the transaction costs eat into your returns. Be an investor not a trader.

  • Remember that a diversified portfolio is a safer one. When you buy different assets, you minimise your overall risk. Your goal in diversifying is to benefit from the performance of different assets that are usually not synchronised. If shares are performing poorly, property or bonds may be performing well. You should include at least one other asset class with shares to diversify your investments.

Ten Things to Remember about Owning Shares

Investing in shares is a great way to increase your wealth. Stock market crashes do happen (as we saw in the global financial crisis of 2008–2009), but if you’re patient, have assessed your risk carefully and have a diversified portfolio that performs well, your nest egg will grow. And don’t forget — owning shares should be fun. Enjoy it!

  1. Shares go up in price, and also down. If you buy shares at a high price and the market falls, you could lose money. But if you buy more shares and the price goes up, you’ll make money on the sharemarket.

  2. ‘Get rich slow’ should be the share investor’s motto. Shares have an excellent long-term track record of generating wealth. If you choose your shares wisely, they will build your wealth better than almost any other asset — if you invest for the long term.

  3. Shares are a risky investment. Because shares generally produce a better return than other assets, they carry more risk, mainly because they are more volatile in price. Using shares as a short-term gamble can give some big wins, but this strategy is fraught with danger.

  4. Shares provide the best return on investment. You take an added risk by holding shares because they provide better returns than other investments. Investment is about creating wealth first, then using that wealth to fund your retirement. You need the capital gains that shares can bring.

  5. Shares need time to increase in value. With enough time and diversification (buying a range of shares spread across the economy), you’re unlikely to lose on the sharemarket. If you’re impatient, and you’re not well diversified, you could lose money in shares.

  6. Sharemarket crashes do happen. The sharemarket suffers occasion alarming falls, but has never failed to get back to, and subsequently exceed, its previous high point.

  7. Shares bring wealth through the magic of compounding. If you reinvest your dividends from shares, the rate of return you earn will be cumulatively larger than the amount you initially invested. Over time, compounding has the effect of accelerating the growth of your wealth.

  8. Owning shares means tax advantages. Your tax situation can benefit using the tax advantages that come with fully franked dividends.

  9. Owning shares means you’re also a company owner. When you buy shares, you’re buying a share of the company’s assets and its profits. In fact (and in law) you’re a part owner of the company.

  10. Sharemarket investment is fun. The sheer range of things that companies do is interesting and informative, and unlocks the mysteries of that nebulous beast, the economy. It’s never too late to learn about shares, and it’s a wonderful interest to give your kids.

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