One of the most frequent questions I’m asked goes something like this:
“I’m a newcomer to this shares lark, how do you buy shares?”
Well, let’s answer that question here.
Now, I’ve only got limited space in Money Weekend so this week I’ll give you a crash course in buying shares. And in the next Money Weekend I’ll give you a crash course in selling shares.
But, I should point out that if you become a member of one of our paid advisory services – Australian Small-Cap Investigator, Diggers & Drillers, Australian Wealth Gameplan, Sound Money Sound Investments or Slipstream Trader – you’ll receive the free e-book “How to Buy and Sell Shares for Profit”.
There you’ll discover all the ins and outs of buying and selling shares in an easy-to-read format, with helpful examples.
Plus, each of these services is obligation-free so there’s no requirement to stay on as a subscriber if you find it doesn’t suit you.
Anyway, until you do that, here’s a brief rundown on how the stock market game works…
Finding a Broker
The first thing you’ll need to do is find a stock broker or share broker. They’re the same thing. And the terms are used interchangeably.
There are many brokers to choose from. If you go to www.asx.com.au you’ll find a list of discount and full-service brokers.
My advice is to use a discount broker. Most – but not all – full-service brokers won’t give you the time of day unless you’ve got at least $200,000 to chuck into the market. And if they do take you on, chances are they’ll give you no service but still charge you $80 per trade!
They’ll charge you about $10-$15 per trade regardless of how many times you buy or sell shares each month.
Once you’ve made up your mind – check out their websites by clicking on the links above – fill out the forms and send them back to the broker. Just be aware that it’ll take a few days to set up an account because they’ll most likely ask you for certified copies of identification papers (passport, drivers licence, that sort of thing).
And part of the paperwork will usually involve setting up a direct debit between your stockbroking account and your bank account. That way the broker can take the money from your bank account when you buy shares, and pay money into your bank account when you sell shares.
Personally, I find this the easiest way of paying for trades.
After you’ve gone through those hoops, you’re ready to trade.
So, let’s go through a hypothetical example. Let’s say you subscribe to Australian Small-Cap Investigator, Diggers & Drillers, Australian Wealth Gameplan, Sound Money Sound Investments or Slipstream Trader and one of the recommendations is to buy shares in XYZ Ltd… what do you do?
Simple. Here’s an example of a typical buy ticket you’ll get with an online broker:
Source: CMC Markets Stockbroking
Or, it could look something like this:
First you’ll need to confirm the ASX Code, in our example the code is XYZ. For BHP Billiton it’s BHP, for Commonwealth Bank it’s CBA and for Foster’s it’s FGL.
All share trading sites have a search function to help you find the stock code.
Next you need to figure out what price you want to pay. If you’re happy paying the current price on the market then you select “At Market” or just “Market”. This means the trade will go through at the lowest price on the offer side of the market.
What does offer mean? Let me explain. I’ll show you what’s called the market depth:
Source: CMC Markets Stockbroking
This shows you the number of buyers and sellers with limit orders in the market (I’ll explain limit orders in a moment).
The offer side of the market just means you’ve got a bunch of people offering to sell their shares at a particular price. So in this case, if you wanted to buy 1,000 shares at the market price you would accept their offer and pay $2.18 per share.
This would cost you $2,180.
An alternative to a market order is a limit order. That simply means you want to limit the price you’re prepared to pay. If you like the company but you’re not prepared to pay more than $2.10 per share, you would enter a limit order to buy shares at $2.10.
This means you’ll wait in a queue on the “buyers” or “bid” side of the market – that’s the left hand side in the market depth above.
As a limit buyer your order will remain in the queue until the share price drops to your level of $2.10 or until your cancel the order.
How Many Shares Do I Buy?
Now, let’s say you only wanted to invest a total of $1,000. How do you work out how many shares to buy? You can easily work it out using the following formula:
Dollar Amount to Invest = Total Shares to Buy
Or to use our example:
$1,000 = 458.72 shares
Because you can’t buy fractions of shares you’d need to round the number up to 459, or down to 458.
This is the number you enter into the order ticket where it says quantity.
One nice feature of the Comsec trading website is that you can click on “Estimate”. This calculates the total cost of the trade including broking fees. This is a good way to make sure you haven’t muddled up your sums or got your decimal point in the wrong place.
If you only want to buy $1,000 worth and you end up buying $10,000 worth it could turn out to be a costly mistake!
By the way, the Australian Securities Exchange (ASX) has a minimum order size. You can’t buy any less than $500 worth of shares in a company.
Once you’ve done all that and clicked the “trade” or “proceed” button, your order is in the market. You’ll receive an email confirmation from your broker when the order has been completed.
On completion of the order you’ll be the proud owner of the shares… a partial owner in a publicly listed company.
Paying for Your Shares
Now all you’ve got to do is pay for the shares. That bit should be easy. Providing you’ve set up a direct debit, your broker will take the money from your bank account in three days without lifting a finger.
You may see reference to a term called “T+3”. This simply means you’re required to pay for the shares three days after you buy them. All regular share trades are settled T+3. Sometimes you may come across something called deferred settlement. But that usually only occurs with initial public offerings (IPOs) or other special situations – we won’t worry about that here as it’s not common.
And that’s it. Now all you need to do is follow the news and advice from your advisory service and hopefully lock away some big gains in a matter of days, weeks or months.
If you’re new to this game, I hope that has helped.
Next week I’ll take you through the process of selling shares you own.
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Monday: So, does that tell you anything about the state of the economy and the state of the retailers? To us it does. It tells us the economy is in much worse shape than you’re being led to believe. But even in a bad economy you’ll still find standout performers. Click here for more…
Tuesday: There’s something rather perverse going on in the markets right now. Good news is good for the market. And bad news is good for the market. In fact it seems like bad news is better for the market than good news. Because it means the US Federal Reserve will pump more fresh cash into the economy. Click here for more…
Wednesday: If you don’t know, China controls about 95% of the global rare earth market… And it knows it. In recent years the Chinese have made massive cuts to rare earth exports. This has pushed the price of rare earths and rare earth stocks higher… and encouraged mining firms to search for these valuable minerals. But what’s China got planned now? Click here for more…
Thursday: So there’s the punishment for failing to alert the markets to the collapse of the global economy. Have another $750 billion. And keep up the good work… by not saying anything next time either. Let’s be honest. That’s what the IMF cash gift is. A payoff… hush money. Click here for more…
Friday: This ‘George Soros tipoff’ could make you 226% to 389% in 24 months. (Just don’t share it with anyone else). Click here for the most intriguing stock story of 2011. Click here for more
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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.