Mozo guides

Share trading for absolute beginners

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Your comprehensive guide to share trading and stock market investing for beginners in 2022. 

If you’re only just learning about the world of share trading, or you want to brush up on your existing knowledge of the stock market, this is the place to start. 

This guide will give you an overview of why investing in shares can be fruitful over the long term, take you through a few of the key ideas that beginner share traders need to know, and give you the information you need to make an informed choice when you compare share trading platforms and buy your first shares.  

If you’re here to get a specific question answered, click on one of the links below to skip to that section. Otherwise, let’s get started with the very basics of shares, share trading, and the stock market.

What are shares?

Shares represent part ownership in a company. When a company goes public (when they are listed on a stock exchange) these shares become available for the general public to buy. 

You can identify shares by their ticker symbol – usually, a three-letter code that abbreviates the company’s name. For example, Apple’s stock code on the NASDAQ stock exchange is ‘AAPL’ and the Woolworths Group’s ticker symbol on the ASX is ‘WOW’. 

When you buy a certain amount of shares, you become a part-owner in that amount of the company. For example, if Company A has a total of 1,000 publicly available shares and you purchase 1 share, then you own a 0.1% stake in that company.

Different companies will have different amounts of shares available to invest in. A large, publicly traded company like Apple could have upwards of 16 billion share units.  

Why do share prices go up and down?

The price of an individual share, known as the market price, will vary depending on the basic concept of supply and demand. If investors want to purchase more shares in a company than existing shareholders are willing to part with, then it’s likely the market price will rise. 

Conversely, if shareholders want to sell their shares in a company and no new investors are interested in buying them, then the price of buying those shares will usually get cheaper. 

Let’s take a look at the reasons people invest in shares.

Why invest in shares?

There are a couple of main reasons people choose to invest in shares: share price rises and dividends.

Share price rises 

One reason people may choose to invest in shares is because of the possibility that the share price will rise. It’s the classic ‘buy low, sell high’ strategy: purchase shares when the market price is low, hold your shares until the price goes up, and then sell your shares for a profit. 

You’ve no doubt heard stories of when people bought shares in a company years before it became a raging success. ‘If you had bought stocks in ‘Company X’ ten years ago, you would have tripled your money by now.’

Dividends

Another reason that people invest is to receive dividends. Dividends are a sum of money that a company pays out to their shareholders, once or twice a year. Not all companies pay dividends, but it can be an attractive reason to invest in the ones that do. 

The dividends usually come out of a company’s profits and are paid on a per-share basis. For example, if you own 100 shares in a company that pays $1 annual dividends, you’ll wind up with an extra $100 per year.  

Of course, it’s difficult to bet on which stocks will take off like a rocket ship in the future or pay out neat dividends, which is why it’s important to understand as much about the world of share trading as possible before you dive in.

Long-term investing vs short-term share trading

Whether you’re looking to grow your wealth steadily over time, or make a quick profit from fluctuating share prices, your approach to investing will either be long-term or short-term. 

  • Short-term: holding your shares for less than a year
  • Long-term: holding your shares for more than a year 

While short-term share traders focus more on buying and selling shares with quick turnarounds of profit, long-term investors key into the underlying performance of the company itself over time. 

Short-term, or day-traders, may buy and sell shares in as little as a few minutes, hoping to capitalise on small market price rises. Long-term investors may hold their shares or exchange-traded funds (ETFs) for a number of years to take advantage of the gradual average returns of an index (like the ASX 200). 

It’s like the difference between kids trading Pokemon cards in the playground: some kids would trade their cards for an LCM bar, whereas some kept their cards in a box under their bed for years post-school, where they gradually accrued in value. 

Both approaches have their merits, but the slow and steady, long-term route may result in higher returns over time – you’ll just have to have a bit of patience. To illustrate, let’s take a look at the ASX 200. 

Over the 10 years to August 2021, the ASX 200 index has an average total return of 9.3% each year. Those taking a long-term investment approach, with stakes in ETFs and index funds, may benefit greatly from these sorts of year-on-year returns. 

However, it’s important to note that the index doesn’t perform so well in some years. Like in 2020, when the average return was a comparatively measly 1.18%. Thanks, Covid!

Things you need to know before you start investing in shares

We’ve already touched on a few of the key terms and ideas in the share trading world, but the fun doesn’t stop there. 

Most new investors will have a lot of questions on their minds when they’re starting out, like how much money they need to start share trading, what types of investments are out there, how to open a brokerage account online, and how to choose your first shares. 

But before we can get into the nitty-gritty practicalities of share trading, let’s take a look at some more of the pertinent terms and ideas which will serve to round out your understanding.

Know the risks of investing

Investing carries risk. It’s important to mitigate risk as much as you can. Consider speaking to an investment professional or licensed financial advisor before you begin.  

Before you start investing, it’s also a good idea to clear any debts or outstanding loans you have, as well as set up an emergency savings fund. That way, you’ll lower the risk of not being able to repay your debts or loans and have backup money in case your investment goes sour.

Basically, (where possible) you’ll want to have guilt-free, disposable income to invest with.

What is the ASX 200?

The ASX 200 is an index that tracks the top 200 companies listed on the Australian Securities Exchange (ASX). 

There are more than 2,000 companies listed on the ASX, so this index helps investors not only narrow down the best-performing companies in Australia but also gives them an idea of how the whole Australian market is performing on any given day.

It’s the Australian equivalent of the Dow Jones, S&P 500 and NASDAQ (USA), Hang Seng (Hong Kong), and FTSE 100 (UK). 

You can actually invest in products called index funds or managed funds which aim to replicate the performance of an index. With these types of investment funds, you’re looking for an overall uptick in market price across a whole index.

What is diversification in investing?

A pie chart divided into different asset classes, like property, shares, cash, savings, and commodities.

Diversification is a risk-management technique that involves spreading your money across a range of different investments in your portfolio. 

How to diversify your portfolio

There are a few ways to diversify your investment portfolio, including investing in different asset classes (categories of investments) like:

  • Shares
  • Property 
  • Bonds
  • Private equity
  • Cash 

But diversification doesn’t stop at putting your cash into different asset classes. You might want to ensure that your investments cover a broad range of sectors too (e.g. energy, financials, healthcare, and resources). 

Why should you diversify your portfolio? 

The reason many people diversify their portfolio is that different asset classes and different sectors perform well at different times. With diversification, you can mitigate the risk of losing all of your money in one fell swoop. 

For example, let’s say you’ve put all your eggs into one basket by only owning shares in a single energy company. This energy company’s bread and butter is undersea fracking for oil and gas. If there were to be an oil spill that spewed toxic chemicals into the ocean, then it’s likely that shareholders in that company would jump ship and sell off their shares, causing the market price of said shares to plummet. 

In that case, the market price of your shareholding in that company may drop below what you paid for them, equating to a financial loss for you. That’s why experts recommend you diversify your investments across multiple companies and sectors. 

However, there are multiple ways to diversify solely through shares. These include: 

  • Investing in exchange-traded funds (ETFs) 
  • Investing in listed investment companies (LICs)
  • Investing in managed funds 
  • Investing in index funds 

Those sorts of investment products don’t rely on a single share or market price, rather they have built-in diversification by way of a range of investments.

Dividends and franking credits

As we briefly touched on before, dividends are sometimes paid out to shareholders by a company. They usually come from a company’s profits and can be paid every six or twelve months. Companies will make a statement to the ASX saying when they will pay dividends and how much the per-share dividend will be. 

Depending on the share trading platform or broker you use, you can expect to receive your dividend as a cheque in the mail or a direct deposit into your brokerage or bank account.

Whenever you receive a dividend, you’ll have to declare it at tax time. However, due to dividends being paid out of company profits, they’ve already been taxed once. It wouldn’t be fair for shareholders to have to pay tax twice, right? This is where franking credits come into play.

Franking credits are a rebate for the tax a company has already paid on their profits before dividends are awarded to shareholders. They are designed to reduce the tax burden on investors and avoid double taxation. 

If the dividends you are receiving have franking credits attached (also known as imputation credit), then come tax time you’ll need to declare both the dividend and the franking credit on your tax return as income.

When do you pay tax on shares?

Collage graphic of woman dropping gift into outstretched hand

Tax is paid on your share investments at the end of each financial year. 

When it comes time to lodge your tax return through the Australian Taxation Office (ATO), you’ll need to declare your investments alongside your regular employment income.

How are shares taxed? 

There are two main types of tax you’ll encounter as a share trader: capital gains tax (CGT) and income tax on your dividends. 

Capital gains tax (CGT) needs to be paid when you buy a share for one price and then sell it later for a higher price. This is known as making a capital gain.

Capital gains need to be declared in your tax return for the financial year in which you sold it and are taxed at your marginal rate. 

Some investors may qualify for a CGT discount if they have held the investment in question for longer than 12 months, which means they’ll only be taxed on half of the capital gain. 

Dividend income tax is also paid for the financial year in which you received the dividends. 

Dividends are calculated as part of your taxable income. However, if your dividends have franking credits attached to them, then you may be entitled to a tax rebate, thereby potentially lowering your taxable income. See the above section for more information on franking credits.

How much money do you need to start investing in shares?

When investing in ASX stocks, the minimum trade when buying shares in a company for the first time is $500. This is known as the Minimum Marketable Parcel (MMP). But that won’t always be the case.  

Some share trading platforms allow you to purchase shares at a much lower volume and cost, which removes the barrier to entry for a lot of future investors. Some accounts even let you start with as little as $1, although that’s not as common. 

Whether you’re starting with $5, $500, or even $5,000, most people will be able to invest their money in some capacity.

The key factor to consider, however, is that both account and brokerage fees can eat into your investments.

What are the costs of investing in shares?

When you start investing, it may be tempting only to focus on the amount of money you’re putting into your investment. But you’ll also need to consider what’s coming out – the fees associated with share trading. 

What are brokerage fees in share trading?

You’ll likely be charged a brokerage fee whenever you buy or sell a share. These fees can range anywhere between $2 to $30 per trade (for small trades), or you can be charged a percentage of the investment amount (for large trades).

Different platforms will have different brokerage fees, so it’s worth comparing share trading platforms and factoring brokerage into your decision. 

You may also find that some online share trading platforms offer limited free trades per month for new customers, which is a bonus to anyone starting out. 

Let’s look at an example of how brokerage fees can impact your investment: 

If you invest $500 at $10 brokerage, then brokerage fees will represent 2% of your investment. However, if you invest $5,000 at $10 brokerage, then brokerage fees will represent 0.20% of your investment. 

For some, it makes more sense to invest larger sums of money to reduce the toll that brokerage fees have on your investment. 

What are monthly fees in share trading?

Monthly fees are what some platforms charge for their services – like a subscription to a streaming service

Some share trading platforms have zero monthly fees, instead relying on brokerage fees alone to make their money back. But for those that do charge a monthly fee, you could be looking at anywhere between $10 to upwards of $150.

Generally speaking, the higher the fee, the more is included in the share trading platform’s services. But as a consequence, you’ll need to ensure the balance between what you can afford to invest and what you are charged in fees can still turn a profit down the track.

How to choose a share trading account

Paper brain silhouette with geometric shapes

While there might be hundreds of share trading platforms out there, some might suit your needs better than others. So, if you’re wondering which share account to go with there are a few things you can consider. 

First, you’ll want to work out which investment products you’re interested in. Are you interested in ASX or US shares? Do you like the sound of diversified ETFs, or do you have specific companies you want to buy stocks in? Any interest in bonds or cryptocurrency? Or perhaps you want the option to do it all?  

By asking yourself these questions, you can get a clearer picture of the features that you may want from your trading account.  

Then, you can compare share trading platforms with Mozo to get a brief overview of what each share trading account offers, including brokerage fees, monthly account fees, key features, and current deals.

It’s worth shopping around at this point, as different accounts do charge different fees. Some may include free brokerage up to a certain amount, while others may not even charge you a monthly fee at all. 

Some share trading platforms come loaded with features like live share market data, broker reports, and analysis. However, these features might only be available through platforms that charge higher brokerage or fees. You’ll need to consider for yourself if these included features are worth the premium you may pay. 

If you want somewhere to start, you can check out the best share trading platforms in 2022. These award-winning online brokers were selected for their features and overall value. 

Once you’ve decided which share trading platform you want to use, you’ll need to open your account.

How to open a share trading account

The process for opening a share trading account will differ depending on the platform. But generally, you’ll need to do the following:

  1. Provide your personal details. You’ll need to give them your full name and a valid form of photo ID (e.g. driver's licence or passport), email address, phone number, street address, and tax file number (TFN). 
  2. Provide your bank details. You’ll need to link your bank account to your share trading account in order to fund it. You may need to make a minimum deposit to get started. 
  3. Complete and submit the application. You may need to fill out an application form, which will take 1 to 2 business days to process. 

Once your application has been approved, you’ll be able to start trading.

How to pick your first stocks

What should you look for in potential investments? Well, there’s no single approach to picking stocks. 

Blue chip companies

Many beginner investors opt for blue chip companies. These are the top 50 companies listed on the ASX (S&P/ASX 50). These companies are well-established and stable, historically providing steady returns with less risk than newer names on the stock market. 

Examples of blue chip companies include Coles, ANZ Bank, BHP, Commonwealth Bank, Origin Energy, Rio Tinto, and Qantas.

If it’s your first time investing in shares, looking at a page full of companies (some of which you’ve never even heard of) can leave you wondering where the heck you should start. Or, maybe you’ve got a fair idea of which companies or funds you want to invest in already. In either case, there are a few things to look out for when choosing your first shares. 

Do your research

Researching a company goes much further than simply looking at its share price history. Expert investors will do their due diligence on a company by looking at the underlying value of the company to determine if they believe it’s worth investing in. 

You’ll want to look at: 

  • Annual reports to see business performance and progress
  • Company alerts and news from ASIC, the ASX, and other media channels 
  • Research reports and insights on the company from your share trading platform (if provided) 

What you should be looking for are any red flags that may indicate a company is in ‘ill health’, so to speak.

Look at market changes and economic conditions

Aside from just focusing on a company, you should also consider the factors which can influence its share price, like changes in the market and economy as a whole.

This is because these factors can influence how much money a company makes, in turn impacting shareholder sentiment and market price. 

The Australian government’s Moneysmart website recommends following factual sources, like:

  • The Reserve Bank of Australia’s quarterly Statement on Monetary Policy (including news about the latest RBA rate rises
  • Business and financial media 
  • Research departments of banks and stockbrokers

Make checking news and reports a habit of yours in areas like the economy, interest rates, government policy, investor sentiment, and overseas market conditions.

Being in the know about what’s happening in the broader economy can help you make more informed choices about buying shares. 

Now that you’ve got an overview of how to get started in share trading, it’s time to get some of the lingo down. Check out the top 15 most-searched-for share trading terms and definitions so that you’re ready to dive into the world of investing, knowing what you’re talking about.

Ready to start share trading? Compare your options with Mozo - rates updated daily

Search promoted share trading below. Advertiser disclosure.
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Jack Dona
Jack Dona
RG146
Money writer

Jack is RG146 Generic Knowledge certified, with a Bachelor of Communications in Creative Writing from UTS, and uses his creative flair to cut through the financial jargon and make home loans, insurance and banking interesting. His reader-first approach to creating content and his passion for financial literacy means he always looks for innovative ways to explain personal finance. Jack's research and explanations have been featured in government publications, and his work is regularly featured alongside major publications in Google's Top Stories for Insurance.