Wealth Creation
The of Share Trading You don’t need an economics degree to buy into the sharemarket. From the basics of the stock exchange to the golden rules of trading, analyst Dale Gillham shares his knowledge.
whereby buyers and sellers are brought together to trade shares at current market prices. Prices are based on what price buyers are willing to pay (the bid) and what price sellers are prepared to sell at (the offer). In simple terms, orders are placed with SEATS and filled once a match between buyers and sellers is established.
more than 1,500 on the Australian Stock Exchange (ASX), how do you know which to choose? All too often, people feel like the job is too big and that it will take up too much of their time, which explains why many investors are happy to hand over control of their investments to others. But this needn’t be the case. The list of stocks you select for your portfolio will depend on the time you have available, your resources and the goal of your Golden Rules In my experience, most people spend more portfolio. That said, I recommend that most investors don’t stray too far outside the top time deciding what to eat at a restaurant here are numerous ways to create 150 stocks on the Australian market for the than they spend selecting which shares to wealth, and share trading can be one of the simplest and most cost-effective buy, so for this reason I always recommend following reasons: investors consider the following golden rules: • The stocks are highly liquid. In other words, ways to get started. Just about anyone can use the sharemarket there is a lot of buying and selling taking to build wealth, as long as they have a basic place in these stocks every day. Rule 1: Irrespective of the amount of understanding of how it works and how to money you have to invest, you should • Stocks from the top 150 are generally buy and sell shares. The following introduction always take the same amount of time profitable businesses with some of the best will be a good starting point, and continued researching your options to ensure you are managers in Australia, providing stability in self-education and research will help you get the protecting your capital on each and every the growth of the company and the share most from your investments long term. occasion. price. Put simply, a share is part ownership of Rule 2: You should always aim to have • They generally pay good dividend yields a business. A company can raise money to between five and 12 stocks in your portfolio, with good tax credits attached. A dividend finance its business by ‘going public’, which although my preference is closer to five. yield is the dividend shown as a percentage means being listed on a stock exchange and The trick is not to have lots of stocks with of the last sale price of the shares. issuing shares to investors. By paying for the small amounts invested in each. You only • Reliable information about these stocks is shares, investors buy part ownership of the require a small number of the right stocks much easier to obtain. company’s business and become a shareholder with larger amounts invested in each – this • The chances of any one of these companies in the company. actually lessens your risk and increases your going broke is very small. You may remember the movie Trading returns. • These stocks will produce good returns over Places with Eddie Murphy and Dan Aykroyd. Rule 3: When you purchase stocks, never a 10-year period. At one point Billy Ray Valentine and Louis invest more than 20 percent of your total Winthorpe III are in ‘the pit’ at the New York capital in any one stock. If you invest in the Venturing outside the top 150 stocks will not Stock Exchange, madly buying and selling sharemarket you need to accept that some only increase your risk level but the knowledge shares on the floor as if their lives depend on stocks will fall in value, however this rule you require to successfully manage the risk will it. This is how all stock exchanges operated in will help reduce your exposure to risk while be greater. Australia until the introduction of the Stock allowing you to achieve good returns, simply Unfortunately, a common misconception Exchange Automated Trading System (SEATS) because you are minimising the amount of for newcomers to the sharemarket is that in 1987. This computerised system superseded capital you could lose at any one time. buying these types of stocks is too expensive the open outcry system that limited the extent and that buying cheap stocks is the best method to which stocks could be traded efficiently. for achieving higher returns. This belief not Choosing Stocks Like all markets, the Australian stock only costs you money, it hinders your ability to Identifying the right stocks to place in your market is driven by supply and demand, portfolio can seem like a daunting task. With generate profits because you are investing your
February/March 2009
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