Before you open a brokerage account, before you put one dollar in the market, before you even try and learn any jargon I want you to take a good long hard look at yourself. I don’t know how you’ve come to this site. I don’t know your circumstances. I have no idea if you’re even up to the task. What I do know is that investing directly in shares is much harder than you think. If you’re new to the share market please understand this now. The floor of the exchange is littered with the empty wallets of people who thought they could get rich quick.
This is the very first and very tiny step on a long journey. Understand who you are. Are you going actually interested in learning all about shares, studying balance sheets, reading research reports, understanding technical and fundamental analysis. Or should you simply purchase index base ETFs, contribute regularly and let compounding work it’s magic over 10 years plus.
I’ve made a lot of mistakes myself. I wish someone had taken me by the scruff of the neck and made me take a good, long, hard look at myself. I only found out by making a podcast, speaking with experts and acknowledging my mistakes.
Forget about getting rich quick. There are plenty of services that make promises. Some are great, some are only interested in taking your money. The best ones will require you to do a lot of hard work to learn a methodology. That’s the key. Learning takes time and effort.
Trading in shares is like learning a language. It’s not something will happen overnight.
In it's simplest form a share is part ownership of a company. Think of it as if you and 2 friends buying a cafe. The cafe has 3 shares of equal value. You and your friends all share equally in the profits or losses.
After a couple of years you want to leave and start a deli. So you sell your share either to your friends or to someone else. That share may be worth more or less depending on how profitable the business has become.
Let's look at Commonwealth Bank as an example. At time of writing there were 1,706,391,603 CBA shares available and about 2,000,000 of those shares were traded on the share market on a single day. At the current market price of $97.91 the bank is valued at $167,072,801,849.73.
The Australian Securities Exchange (ASX) handles the ownership and the financial transactions. You don't really have to worry about that. It works. The sharemarket is a marketplace for buying and selling these shares. All you need is a brokerage account to participate.
Doing well with money has a little to do with how smart you are and a lot to do with how you behave. - Morgan Housel.
Rewards are directly tied to risk. Cash in the bank carries very little risk but you don't get much back in the way of interest. Speculative mining stocks can generate fantastic returns but carry a lot of risk. Most will do nothing or disappear without a trace.
A key point to understand is the difference between an investor and a trader. A trader is looking for short-term gains. They are not interested in dividends. The trade of is usually short term often very short term. While the investor is interested in both capital gains and dividends. The holding time for investor is longer, certainly longer than weeks and months. It's maybe years or forever in the case of a buy and hold investor. And you can be both a trader and the investor.
"Each person has to play the game that takes into account his own psychology. If losses are going to make you miserable – and some losses are inevitable – you might be wise to utilise very conservative patterns of investment and saving all your life. So you have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one-size-fits-all investment strategy that I can give you.”
- Charlie Munger, 1998, answering, "How do you learn to be a great investor?"
Australian Shareholders' Association is a fantastic organisation that advocates on behalf of retail shareholders and provides a ton of great information for learning. They also hold member meetings where investors share their experience and opinions about the many companies available on the ASX.
I was struck by a comment from a member who said: "Treat your portfolio like a garden" When I asked her what that meant she said to leave it alone to grow, pruning and weeding once a year.
That was a light bulb moment for me. I was too focussed on taking short term gains and locking in losses unnecessarily.
"An investment in knowledge pays the best interest." - Benjamin Franklin