Occasionally we talk about share trading here at Savings Guide. Often we try to shed some light on the magical world of investments that are often overly confusing, however today I wanted to talk to some of you who are interested in investing in shares but a little unsure of some of the tricks investors use.
What do I mean by tricks? I mean the tidbits of knowledge, the share trading tips that people use to avoid bad decisions and in general, bring a little bit of logic to their share trading strategy.
Now remember, the share market can go up and down, sometimes in a matter of seconds. So before you ever consider investing in shares, be sure to discuss your individual situation with a financial planner.
Now, here are some tips for investing in shares that you would be wise to understand.
Understand why people choose shares of a mattress or savings account
Want to know the real reason people opt for investing in shares? It’s quite simple yet something I never thought about.
Savings accounts earn you regular interest. You earn money on your money (compound interest) which is great.
Shares, however, earn you irregular interest in that you earn in the form of dividends. This means your shares may still return less, the same or even more than a high-interest account at end of year dividend payment time – but with one catch. The whole time your money is able to potentially grow as the share price grows (as well as decline) – this means you are earning a return on your money via dividends (that often outperforms savings accounts) while also exposing your money to even higher growth. Make sense? I hope so, it’s a little complicated to explain.
Consider the fees you pay when buying shares
Most share trading platforms will charge you a fee per transaction when buying shares. This means for each company you buy, you are handing over a set fee which is often tiered by how much money you are spending.
What you need to be careful of is the fees and how much of a return is required on your shares to simply even cover that buy fee.
Take for instance Direct Shares, the share trading platform by St.George.The fees are as follows:
- $19.95 for up to $5,000
- $24.95 for $5,001 to $10,000
- $29.95 for $10,001 to $28,000
- 0.11% of the money you spend over $28,000
Imagine you buy $500 worth of WBC (Westpac Banking Corporation, the owner of St.George). Each share is $31 which means you will end up with around 16 shares.
You will pay a fee of $19.95 for the purchase of these shares and when worked out as a percentage of the initial $500 (using the Savings Guide percentage calculator) – it comes to around 4%.
That means the shares need to go up by 4% in order to cover the $19.95 fee otherwise you are out of pocket. So the share price needs to go from $31 to $32.24 an increase of $1.24 (or 4%).
So what is the tip here? Factor in the fees when buying shares. Often the more shares you buy, the better economies of scale you can achieve, in turn alleviating the impact of fees on your share price.
Understand what dollar cost averaging means
Dollar cost averaging is the concept that when you buy multiple packages of shares, over a longer term, it helps you even out the whole ‘buy price’ as the shares will go up and down over that time.
So for instance, you may buy shares when they are cheap, you may buy some more when they are expensive, you may buy some on a whim with a tax return – the concept is that buying shares regularly and distributed over a number of months or years, the average buy price will even out, in turn making those ‘expensive’ moments less upsetting and the cheaper moments more ‘average’.
This is a great way to look at investing in shares as it alleviates one of the biggest question which is ‘when is it the right time to buy shares?’.
Think long term, not short term
The share market has proven (according to BT Financial Group’s ‘Bigger Picture’ campaign) to do very well for itself over any 10 year period. They say that by investing in shares and riding out the daily bumps, over a 10 year period, you are unlikely to make a loss.
I never believe companies with these statements as their email signatures clearly state “Past performance is not an indicator of future returns” – so remember this instead. Shares are longer term prospects, watching the market daily will drive you insane. The biggest share market tip I was given was to invest in shares for the long term.
Diversify your shares to limit your exposure to any one industry
A great tip is to ensure you aren’t overly invested in any one given company or stock. If you have all of your money on a single share your level of risk is higher. You literally have all your eggs in one basket.
Try diversifying your purchases between multiple companies in multiple industries, this means no one company can completely and utterly wipe out your portfolio.
Reinvest the dividends if you want to grow your portfolio
Another great share trading tip. Most companies will ask you whether you want to reinvest your dividends (profits paid to shareholders) each year.
If you want to grow your shares, opt to reinvest the dividends. This can be a great way to increase your shareholding in the company and regularly see your portfolio get bigger. The best thing about this share tip? Each year, you then earn dividends on your dividends, which results in a bigger shareholding for you.
Don’t invest the dividends if you want income
Alternatively, you can opt to be paid your dividend in cash. This comes in the form of a cheque and is great for people who are wanting to draw an income from their shares. Perhaps they want to use the income to repay debt instead? Many financial advisors love shares and see them as a way to have money in the market that can also generate returns for you to use to limit your exposure to debt.
Read as much as you can on the companies that interest you
Never stop reading about companies you invest in. You should aim to be the most informed and well educated shareholder of the company. Learn the products they sell, the products they intend to sell, the executive team and who they are – learn as much as you can.
Read the papers, read the statements they send you and always keep up to date on your investment. Today’s smart share purchase could be a dud in 5 years time as things change – never assume your investment is safe and always proactively manage it.