Thursday, June 5, 2008

Australian Stock Market Basics

The Australian Stock Market has had a rough ride in recent times. The major market indices have come off the boil over the past year or so after a run of stellar gains over the preceding years. This recent market turmoil has seen many beginner investors sitting on the sidelines waiting to see what happens next. For those considering buying into shares, this post will discuss some of the basics of investing in the Australian Stock Market.

Let's start with the Australian Stock Exchange also known as the ASX. This is the organization responsible for maintaining the main share market in Australia. While there are other exchanges in Australia (the Newcastle Stock Exchange or NSX comes to mind) the bulk of equities are traded on the ASX. If you want to buy shares, you'll need to do it through the ASX. But you can't buy directly from the ASX - you'll need a broker, but I'll come to that later.

Before going any further, perhaps we should go back and look at what a share is since this is what's changing hands on the ASX. A share represents ownership of a small portion of a publicly listed company. Each share entitles the owner to a proportion of the company's profits which are distributed as dividends. It also gives the owner a say in how the business is run by allowing them to vote at the company's annual general meeting as well as any special meetings which are called throughout the year. This concept of ownership is an important one to grasp. When you buy a share you're buying part of a real business, not just a symbol for which prices are quoted daily in the newspapers.

That leads me nicely to my next point. In my opinion, most of your stock market investments should be long-term. You should be looking at 5 years or more. This means buying quality companies and holding onto them as their profits and dividend payouts rise. This will help you to ride out short term market fluctuations and hopefully allow you to profit handsomely over time. The other advantage of being a long term investor is that you will lower your costs. Your stock broker makes money each time you buy and sell, and the Australian Government takes their share as well in the form of capital gains tax.

And speaking of stock brokers, make sure you get a good one. There are discount brokers around (the most well known of those is probably ComSec) and while they normally provide free company information and research, they don't normally offer individual advice. A discount broker may be fine if you know what you're doing but if you're still coming to terms with the basics, a full service broker might be the way to go. A list of brokers is available through the Australian Stock Exchange.

One final thing to keep in mind is that with compulsory superannuation, most of us already have exposure to the Australian stock market through our super funds (this has probably become quite apparent looking at the recent returns from our super funds). The percentage invested will typically depend on what option you have chosen. The more aggressive options tend to have greater exposure to equities. So when we're considering investing in shares we need to remember that most of us already have some if not a significant exposure through our superannuation.

That's all I have time for today. While this post really only scratches the surface, the main points I wanted to get across are that when you buy shares, you're actually investing in a business and you should definitely think of it that way. And as such you should be taking a long term view. You wouldn't buy your local mixed business one week just to sell it the next would you? I'll discuss more Australian stock market basics in my next post.

2 comments:

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