The moral rights of the author have been asserted.
ISBN: 978-0-730-39653-6
All rights reserved. No part of this book, including interior design, cover design and icons, may be reproduced or transmitted in any form, by any means (electronic, photocopying, recording or otherwise) without the prior written permission of the Publisher. Requests to the Publisher for permission should be addressed to the Contracts & Licensing section of John Wiley & Sons Australia, Ltd, Level 1, 155 Cremorne Street, Richmond, Vic 3121, or email auspermissions@wiley.com
LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: WHILE THE PUBLISHER AND AUTHORS HAVE USED THEIR BEST EFFORTS IN PREPARING THIS WORK, THEY MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES REPRESENTATIVES, WRITTEN SALES MATERIALS OR PROMOTIONAL STATEMENTS FOR THIS WORK. THE FACT THAT AN ORGANIZATION, WEBSITE, OR PRODUCT IS REFERRED TO IN THIS WORK AS A CITATION AND/OR POTENTIAL SOURCE OF FURTHER INFORMATION DOES NOT MEAN THAT THE PUBLISHER AND AUTHORS ENDORSE THE INFORMATION OR SERVICES THE ORGANIZATION, WEBSITE, OR PRODUCT MAY PROVIDE OR RECOMMENDATIONS IT MAY MAKE. THIS WORK IS SOLD WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING PROFESSIONAL SERVICES. THE ADVICE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR YOUR SITUATION. YOU SHOULD CONSULT WITH A SPECIALIST WHERE APPROPRIATE. FURTHER, READERS SHOULD BE AWARE THAT WEBSITES LISTED IN THIS WORK MAY HAVE CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN IT IS READ. NEITHER THE PUBLISHER NOR AUTHORS SHALL BE LIABLE FOR ANY LOSS OF PROFIT OR ANY OTHER COMMERCIAL DAMAGES, INCLUDING BUT NOT LIMITED TO SPECIAL, INCIDENTAL, CONSEQUENTIAL, OR OTHER DAMAGES.
Trademarks: Wiley, the Wiley logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Making Everything Easier, dummies.com and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries, and may not be used without written permission. All other trademarks are the property of their respective owners. John Wiley & Sons Australia, Ltd is not associated with any product or vendor mentioned in this book.
Part 3: Buying, Buying,
CHAPTER 6: Buying and Selling Shares
CHAPTER 7: Knowing
CHAPTER 8: Buying What You
CHAPTER 9: Buying Specialised Shares and
Part 4: Doing
Part 5: Shares Are for Everyone
CHAPTER 22:
Part 6: The Part of Tens
CHAPTER 23: Ten Great Investors and Their Strategies
CHAPTER 24: Ten Great Books to Read Next
CHAPTER 25: Ten Great Sharemarket Crashes
CHAPTER 26: Ten Great Australian Stocks
CHAPTER 27: Ten Things Not To Do, Ever
Checking
The
Reviewing the independent experts’ reports
PART 6: THE PART OF TENS
Jim Slater
Charles Viertel
CHAPTER 27: Ten Things Not To Do, Ever
Don’t Think You Can Get Rich Quick
Don’t Underestimate Volatility
Don’t Be Panicked Out of Your Shares
Introduction
Isaid these important words in the first three editions of this book, and now I’m saying them again — thanks for choosing Share Investing For Dummies. In this fourth edition, I bring you up to date on how the Australian sharemarket is dealing with the massive societal and economic changes wrought by the global COVID-19 pandemic; as it happens, in the introduction to the third edition I talked about bringing readers up to date on how the market was recovering from the massive financial storm that hit it (and all its global peers!) between 2007 and 2009, during the global financial crisis (GFC). Just as the GFC and the market slump that ensued eventually receded into history — despite denting many investors’ faith in investing in shares — I’m reasonably confident that COVID-19 will do the same.
In any case, just as in the preceding editions, such changes in the sharemarket give me a backdrop to set out how, despite the scary headlines and the everpresent possibility of a market fall, profitable companies continue to generate capital growth for their shareholders over the long term. The great paradox of the sharemarket is that while it is the most volatile of the asset classes, it is also the one most capable of reliably building wealth over the long term for the individual investor; I show you how in this book.
I’ve attempted to describe some of the wondrous investment stories that have played out on the corporate paddock since the first edition of the book was published 21 years ago — as well as some of the less luminous stories that are always possible when you’re investing in shares. This fourth edition also updates my advice on where to start if you’re a first-time investor, some of the newer tools that are available to you, some of the pitfalls to avoid and how to have fun (and not take too many risks) while your money goes to work for you.
Australia has grown and developed in many directions since the first edition of Share Investing For Dummies welcomed investors taking their first steps into the sharemarket. If you followed the first three editions, you’re hopefully now managing a portfolio, researching stocks that interest you, keeping abreast of the daily market play and boosting your initial investment to something that’ll at least pay for your dream holiday and at best see you comfortably through the years.
In many of the speeches and presentations that I’ve made around the country in 33 years as a finance journalist, I’ve tried to present the sharemarket as a hugely
interesting institution. Because it is! And, moreover, this market, which touches everyone’s lives in one way or another, doesn’t have to be daunting. The sharemarket is not a hard concept to understand. When people say to me that I make the idea of buying and selling shares understandable for them, I curse whatever it was they’d been reading or hearing that made it appear the opposite.
About This Book
Share Investing For Dummies explains the sharemarket’s intricacies in terms that anyone can understand. Although the sharemarket looks like a high-tech computer game, with its flashing lights and scrolling letters and numbers on the trading screens, the sharemarket is actually based on a very simple concept. Companies divide their capital into tiny units called shares, and anyone can buy or sell these units in a free market at any time. Companies use the sharemarket to raise funds from the public, and the public — meaning you — invests in the companies’ shares. You invest your money in shares because you expect to get a better return in earnings than with other investments.
Most of the time the sharemarket is profitable for investors. Despite the occasional spectacular market fall, such as the great ‘bear market’ of 2007 to 2009 — or even the odd collapse of one of its constituent companies — the sharemarket generally plods along making money for its investors. The sharemarket revolves around money, but it is also very much a human institution. The sharemarket is sometimes described as a living entity (for which we finance journalists are often mocked). Oddly, the sharemarket does have human moods because it reflects the greed or fear of its users, who are sometimes very human.
Greed is a powerful influence on the sharemarket, and so is fear. A saying on Wall Street suggests that these two emotions are the only influences ever at work on the sharemarket, and they fight a daily battle for supremacy. On a day-to-day basis, the sharemarket wavers between the two. The 2000s began with the fear of the ‘tech bust’, then switched firmly to greed for the middle part of the decade, only for fear to come roaring back into the spotlight in late 2007. Greed regained its primacy in early 2009 and — despite a major interruption in 2020 as COVID-19 reared its ugly head — the ‘risk-on’ approach of viewing the sharemarket as a money-making machine has prevailed virtually right through until the time of writing. All of which goes to ensure that fear will have its day again, and sooner rather than later.
The sheer range of activities of the companies listed on the Australian Securities Exchange (formerly the Australian Stock Exchange) makes it a very interesting place — if a trading system that you can see only on computer screens all over the
nation can be called a place. The number of different types of shares you can invest in is mind-boggling — perhaps there is too much choice. As an individual investor, you can’t own every type of share so the solution is to come up with an investment strategy.
As you will discover, of the 2,200 or so stocks listed on the Australian Securities Exchange (ASX), most investment professionals confine their activity to about one-sixth of them. Even in the 500 stocks that comprise the S&P/ASX All Ordinaries index (one of the Australian sharemarket’s main indicators), the last 1,900 or so don’t hold much interest to Australian fund managers. This is where a selfreliant investor like you can find some undiscovered gems caught in that bind of being too small to attract the fund managers’ and brokers’ attention, and then remaining small because they can’t get this attention. Some of the sharemarket’s acorns really do become great oaks. As a self-reliant investor, with the knowledge and the time to thoroughly research potential stock purchases, you can really steal a march on the pros.
It gets harder and potentially more rewarding the deeper you delve into the sharemarket. In the bottom 1,900 or so stocks, you may find some real dogs that should not be listed (and probably won’t be for much longer), but you can also discover wonderful companies that are about to flourish. This kind of investing is called bottom-fishing. You need to be wary and know how to back up your discoveries with solid research. At these depths of the market, you can make some very wrong moves.
You don’t actually have to own some of the 2,200 stocks in order to experience the ups and downs of the sharemarket; one of the big changes in the market in the last two decades has been the introduction of (and growth in) simple and cheap listed instruments that give you instant, diversified exposure to the sharemarket (whether you choose the Australian, US, global or other country markets) and asset classes in general. Access to the sharemarket has never been easier, and I take you through that, whether you want to invest at the individual stock (company) level or the index (sharemarket itself) level. The tools that enable you to get into the market intelligently are right here in this book.
The sharemarket should be an essential part of everybody’s investment strategy. Sharemarket participation in Australia is among the highest in the world, but too many people still don’t understand its benefits. As the nation’s population ages and superannuation grows in importance, the amount of Australians’ investment assets (and retirement nest eggs) going into Australian shares is set to rise dramatically. My aim in this book is to help you understand the sharemarket so that you can control your future financial security.
Foolish Assumptions
This book doesn’t require you to have any prior knowledge of investing in shares — that’s my job. However, I do make a few assumptions about you — I assume you’re interested in the sharemarket and you want to find out a bit more. Perhaps you’ve read a few blogs, watched a few YouTube videos or read other books that piece together various aspects of share investing, and you’re looking for something to help you turn the theory into reality. Perhaps you’ve already traded shares online at some stage, or maybe you’ve realised that the bulk of your superannuation is held in shares, and you want to know why — and how that works.
Wherever you’re starting from, this book is designed to help you build on your existing knowledge and develop your understanding of the sharemarket and the things that influence it — for good and bad.
Icons Used in This Book
Throughout this book you see friendly and useful icons to enhance your reading pleasure and highlight special kinds of information. The icons give added emphasis to the details that I think are extra important.
Take extra special notice of this piece of information. You may find this detail is something to store away for future use.
It’s not vital that you read this stuff as you’ll get a good understanding of the subject matter anyway. But it’s often interesting and sometimes an entertaining diversion.
This is information I think you can profit from, so I’ve pre-highlighted it for you (I’m trying to save you from getting highlighter ink on the opposite page when you close the book).
Uh-oh! Wealth hazard ahead! Manoeuvre carefully around this obstacle, and mark it down in the memory bank.
Where to Go from Here
In this book, I set out the risks and the rewards of share investing, explain where the returns come from that can make share investing a rewarding and lucrative experience, and outline the many things that influence the prices of shares. I follow a logical order so that you can easily navigate to the correct chapter to find out more about particular aspects of share investing. For example, you may be itching to explore investment strategy ideas (which I cover in Part 2) or prefer to start with the basics in Part 1. Alternatively, you may be looking for inspiration when picking the stocks that suit your risk ‘comfort zone’ (Part 3), or you might want to contemplate looking further afield at overseas shares and derivatives (Part 5). And if you’re feeling particularly keen, you may find yourself drawn to the number-crunching involved when making sense of fundamental and technical analysis techniques (Part 4) — just don’t forget your calculator!
I hope that after you go through this book, you’ll want to take the next steps to starting your first portfolio of shares. And if you’re already an investor — great! You’ll be ready to become a better-informed and more effective investor. Work out what financial security means to you, sit down with a financial adviser (or not; but it is advisable) and decide how shares can help you achieve your goals. Then, get started. Today!
Thanks for allowing me to play a small part in your journey — I’m excited for you too, as I know what an adventure it can be.
1 Putting the Share in Sharemarket
IN THIS PART . . .
See how the sharemarket builds wealth.
Figure out the two functions of the sharemarket.
IN THIS CHAPTER
» Timing your investments
» Defining a share
» Buying for profit
» Discovering the five big pluses
» Reducing risk
Chapter 1
So, You Want to Invest in Shares
If you’ve been hearing about the sharemarket for a long time, but you’re only now taking the plunge, welcome aboard. There simply isn’t a better place to invest money.
You’re probably already familiar with shares and how they generate long-term wealth. In that case, you may want to skim through Chapter 1 and Chapter 2 quickly and then move on to Chapter 3 for an in-depth view of investment strategies. If that isn’t the case, then you’re in the right spot to get started.
Investing Is All about Timing
Australians are among the world’s most avid share investors, with the Australian Securities Exchange (ASX) reporting in its 2020 Australian Investor Study that 35 per cent of the adult population, or 6.6 million people, directly own listed investments — a term that covers shares, real estate investment trusts (REITs), exchange-traded funds (ETFs), listed investment companies (LICs), listed hybrid securities and anything quoted on an exchange (the ASX and international exchanges). The figure is slightly lower than the 37 per cent of adult investors who owned on-exchange investments in the 2017 Australian Investor Study.
While this proportion has fallen from the 55 per cent that owned shares in the ASX Share Ownership Study in 2004, the ASX now looks more broadly at investing. The ASX used to compare Australia’s share ownership levels with its overseas peergroup of markets, but differences in methodology mean that it no longer does so. For example, official US data measures share ownership — directly or indirectly — by households. A survey released by polling group Gallup in April 2020 found that 55 per cent of American households reported having money invested in the sharemarket, either in an individual stock, a mutual fund or a retirement account. That figure was down from 60 per cent before the ‘Great Recession’ (what Australians would call the global financial crisis, or GFC) of December 2007 to June 2009.
The ASX’s 2020 Australian Investor Study found that:
» 9 million adult Australians own investments outside of superannuation and their primary residence.
» Of those 9 million, 6.6 million own on-exchange investments, making them the most widely used type of investment. Other options invested in included investment properties (residential or commercial), unlisted managed funds and term deposits.
» Of the 6.6 million who own on-exchange investments, 58 per cent own shares listed on an Australian exchange and 15 per cent own shares listed on an international exchange.
» 15 per cent of Australian investors own ETFs.
» Close to a quarter of all investors had started investing in the two years leading up to the study.
» Women now make up 45 per cent of all new investors.
In addition to this data, Australian investors own a further $1.2 trillion worth of shares (domestic shares of $595 billion and international shares of $610 billion), which are managed for them in their superannuation accounts.
Furthermore, a 2021 report from investment research firm Investment Trends, the 2021 1H Online Investing Report, found that during 2020, 435,000 Australians began trading listed investments for the very first time amid the pandemicinduced lockdown. The report said this took the population of active retail online investors (defined as those buying or selling shares at least once over the 2020 calendar year) in Australia to a new high of 1.2 million.
Of these new-to-market traders, 18 per cent were younger than 25 years of age and 49 per cent were aged between 25 and 39, indicating what Investment Trends called an ‘unprecedented’ spike in activity by Millennial (born between 1981 and
FIGURE 1-1: Ownership of on-exchange investments in Australia 1986–2020.
1996) and Generation Z (born after 1997) Australians. This increase in active traders represents a 135 per cent jump since June 2013 and a 66 per cent increase year-on-year from December 2019.
The Investment Trends research also found that the number of Australians actively trading international shares (as opposed to ASX-listed investments) doubled from 54,000 to 109,000 over the course of 2020. The report suggested that growth in the supply of low-cost digital investing and stockbroking products, many of which provide easy access to the US and other offshore markets, was supporting the influx of new sharemarket participants.
So, chances are you’ve dipped your toes in the sharemarket pond (at least indirectly) before picking up this book.
Figure 1-1 shows share investing trends in Australia from 1986 to 2020.
Source: 2020 Australian Investment Study, Australian Securities Exchange
Note: Where earlier data relies on ownership of shares, the studies since 2014 have used ownership of all listed investment products offered at ASX, which includes shares.
‘Hang on,’ you say, ‘doesn’t the sharemarket crash and correct regularly? What about the headlines that talk of billions of dollars of investors’ savings being wiped off the value of the sharemarket in a day?’ (For one example among many, see the sidebar ‘Just another (crazy) year on the sharemarket’, later in this chapter.)
FIGURE 1-2: The growth of a $100 investment in the sharemarket over 70 years.
Occasionally, that happens. No-one who goes into the sharemarket can afford to ignore the fact that, from time to time, share prices can suddenly move in an extreme fashion — sometimes up, sometimes down. When share prices move down, they attract media headlines. However, what the headlines don’t tell you is that on many other days, the sharemarket is quietly adding billions — or even just millions — of dollars in value to investors’ savings (I expand upon this in Chapter 3).
People want to invest in the sharemarket because the unique qualities of shares or stocks (the terms are used interchangeably in Australia) as financial assets make the sharemarket the best and most reliable long-term generator of personal wealth available to investors. Since 1900, according to AMP Capital, Australian shares have earned a return of approximately 11.8 per cent a year, split fairly evenly (49 per cent to 51 per cent) between capital growth and dividend income respectively.
And since 1950, according to research house Andex Charts, the All Ordinaries Accumulation Index (which counts dividends reinvested, as well as capital gain) has delivered an average return of 11.7 per cent a year up to 31 December 2020, which is enough to turn an investment of $100 in 1950 into $260,786 (see Figure 1-2). That compares to 7.5 per cent a year for bonds, 6.1 per cent a year for cash, and inflation at 4.8 per cent a year (making the sharemarket’s real or afterinflation return 6.9 per cent a year). In the 30 years to 31 December 2020, says Andex Charts, the same index earned 10.1 per cent a year, for a real return of 7.8 per cent a year.
