The world of investment comes with its own jargon which can often seem overwhelming to newcomers at first, but with a little research and a good guide, you can quickly begin to talk about your investments with confidence.
One term people new to the game often ask about is ‘investment portfolio’, which simply refers to your collection of invested assets. This guide aims to help readers new to the world of investment understand some of the core concepts surrounding the fundamentals of the stock market.
Investment portfolios come in all sorts of shapes and sizes, and can include investments like stocks, bonds, mutual funds and exchange traded funds (EFTs).
Building a high-return investment portfolio isn’t easy.
But there are a few steps to follow to help you be on your way.
I’ll outline those steps below, and then expand on them in more detail.
Here’s what you need to do to start your own investment portfolio:
Choose who to open your brokerage account with
Complete an application form to open your brokerage account
Decide how/where you want to invest your funds
Research industries, shares etc.
Place your trades
1. Choosing Your Account
When it comes to choosing who you want to open your account with, there are a number of options. All the banks and many smaller brokers offer online trading platforms for relatively low cost.
2. Open Your Stock Brokerage Account
Once you decide on a platform, simply download an application form and fill it out. In many cases, you can do it all online. Keep in mind though, you may need to open a basic cash account with the provider to hold your initial cash investment. This cash account is linked to your online trading account.
Once set up, you will have a user name and password to ensure secure access into your account. You will need to enter these details each time you want to buy or sell shares.
3. Where you Invest Your Funds
You then need to decide how or where you want to invest your funds.
If you’re unsure, think about engaging with a financial planner to discuss how to start a share portfolio. They will be able to assess your financial situation and can help you with things like asset allocation and diversification. That means how much of your money you put in each asset class, like shares and bonds, and how much you invest locally versus overseas.
They do this by understanding what type of risk appetite you have and how you might react to certain adverse scenarios.
However, keep in mind if you’re starting out with a relatively small sum of a few thousand dollars and a modest monthly saving plan, don’t expect much in the way of service from the financial planning network. They won’t be too interested in securing your business.
Assuming you want to do it yourself, you need to decide on what type of investments you want in your portfolio.
All online trading services allow you to buy and sell shares directly. But some also provide access to managed funds, which provide more diversification than direct share investing.
When investing through a managed fund, you give your capital to a fund manager and they invest it in the stock market. How they invest depends on the type of fund you put your money into.
For example, if you invest in a basic ‘Australian share fund’, your investment will probably be spread out across 100 or more of the largest stocks on the Australian Stock Exchange (ASX).
If you’re more specific, you can choose a commodities or resources fund, or a small companies fund. There are hundreds of options when it comes to managed funds.
Keep a close eye on the fees, though. Usually, you’ll have to pay a management fee to the fund manager, and an admin fee to the online trading platform.
Often, you’re better off bypassing these fees and investing in a straight index fund. I’ll explain more about that in a moment.
If you’re starting out small, a good idea is to set up a regular savings plan where you automatically invest each month and buy a certain amount of units each month to add to your total.
This also has the advantage that you’re not investing all your capital at a certain point in the market. It allows you to ‘dollar-cost average’ your way into the market.
I mentioned fees before. It’s really important when it comes to managed funds. Have a look at the long-term returns the fund you’re interested in has delivered over a five- or 10-year period and then compare it to the fees charged.
If you’re looking at a return of 5% and fees of 2%, you have to ask whether it’s worth giving the fund manager 40% of your investment earnings.
Investing in index funds is a cheaper alternative to fund managers who don’t add much value, but charge fees like they do. As the name suggests, when you invest in an index fund, your money is spread across the stocks that make up that index.
For example, if you invest in the ASX 200 Index, your capital goes into the top 200 stocks listed on the ASX. You won’t outperform the market investing like this, but you won’t be paying a fund manager top dollar to TRY and outperform the market, only to fail.
Direct Share Investing
If you really want to get some share market experience and learn how it all works, direct share investing is another option.
This is where you buy a share in a company directly through an online trading platform. Here you can buy into a stock as large as the Commonwealth Bank of Australia [ASX:CBA], or as small and obscure as a tiny gold explorer with nothing more than grand plans.
Owning a share in a company means you own a small piece of that company. If the company does well and increases profits, you’ll be rewarded with a rising share price (which means you make money). In addition, the company may pay a dividend. This is a cash payment that you will receive, most commonly twice a year.
However, if the company you decide to invest in doesn’t do well, the share price can fall, meaning you will lose money. And some companies go out of business, meaning you could lose all of your investment.
4. Research industries, shares etc.
Once you’ve decided to invest in shares directly, you need to decide on which ones. A good strategy that can help with risk management is to spread your investments over a few different stocks and industries.
Putting all of your investment into a single sector means if the industry goes through a downturn, you’ll find all your investments falling, rather than just one or two stocks. A diversified portfolio helps mitigate this risk.
Of course, knowing which stock to buy can be difficult at first. But there is a wealth of online material that can help you on this front. Your online broker will have stock ideas and research for you to read, or you can subscribe to a share tipping newsletter service.
If you want to learn how to invest yourself, you’ll need some basic accounting knowledge so you can understand a profit and loss statement, balance sheet and cash flow statement.
This all seems daunting at first, but with a little application you will soon learn the basics.
5. Placing Your Trades
nce you decide what you want to buy, it’s time to place your trade. This is as simple as logging in and typing the stock code into your online trading platform.
Then click on ‘buy’ and you will be given the option to buy a certain dollar amount, or a specific number of shares.
You then need to specify if you want to buy ‘at market’ or put in a price limit. An ‘at market’ purchase will execute almost immediately and take place at the market price (at or near the last traded price). A limit price will only execute if someone else is willing to sell their shares at that price.
And that’s it. Once you buy a share, it goes into your ‘portfolio’. You can view your holdings in your trading platform.
Starting an investment portfolio through owning shares directly can be very exciting. But also risky for the novice investor. That’s because you have full responsibility over the investment. You have to decide whether to buy, sell, or hold on.
You should always do your own research before you decide to invest. As I mentioned, there are plenty of online resources to help you decide what to do. Ultimately, the best resource is your own judgement, and that comes with experience.
Most first-time investors start by buying small, highly risky stocks in the hope and expectation that they will soar in price and make them rich.
But it doesn’t work like this. More often than not, it’s the quickest way to lose money. Smaller stocks are very volatile, and inexperienced investors aren’t used to handling such volatility. Sharp share price moves can have a big impact on your emotions, and lead you to make the wrong decisions under pressure.
All investors have to deal with the emotional side of investing at some point. But as a tip for first-time investors, you’re better off sticking to the bigger stocks and gaining your investment experience slowly.
Over time, you will get better and be able to assess whether you can afford to take on more risk by investing in smaller stocks.
Hospitals don’t send rookie doctors in to perform heart transplants on their first day, even though they have lots of theoretical knowledge.
In the same way, don’t take on stock market investing and expect to make an immediate success out of it. Always remember that when you buy and sell shares, you’re buying and selling from someone else. That someone may or may not know a lot more than you about the company’s situation or future prospects.
The stock market is full of very smart operators who call investing a profession. That’s who you’re up against when you’re investing. So go into it with your eyes open, and expect to make mistakes and lose money initially. But if you learn from your mistakes, you’ll make less of them and hopefully start making money consistently.
You’ll see your investment portfolio grow with your experience.
So, get to it, and happy investing!