Crash Course on How to Buy ASX Shares
By Dale Gillham |
If you want to learn how to buy ASX shares with confidence, you've come to the right place.
When it comes to investing in the stock market, buying ASX shares can be a very rewarding experience. While there are risks, the rewards can be worth it. That's why this comprehensive guide is designed to give you the steps and know-how to buy ASX shares for the first time.
Understanding the basics of ASX shares
The Australian Securities Exchange (ASX), also known as the Australian Stock Market, offers investors access to a wide variety of options to invest in shares. While there are other exchanges in Australia, such as the National Stock Exchange of Australia (NSX) and Cboe Australia, formally Chi-X, the ASX is the largest stock exchange.
Before you start buying Australian shares (also known as stocks) on the ASX, it's important to understand the basics of investing in ASX shares.
1. Types of shares
Shares can be broadly categorised into three types: ordinary shares, preference shares and partly-paid shares.
Ordinary shares give you the right to vote at general meetings and participate in the distribution of dividends and other assets, but they don't carry any special or preferred rights over other shareholders.
Preference shares, on the other hand, typically offer dividend payments at a fixed or floating rate and priority over ordinary shareholders in the event of liquidation, but they usually don't come with any voting rights. There are different types of preference shares, and each will have different rights and characteristics.
Partly paid shares, also referred to as contributing shares, are issued without the company requiring full payment of the issue price. The holder of a partly-paid share generally has the same rights as an ordinary shareholder, including the right to vote, receive dividends, and participate in the winding up of the company. However, these rights will be proportionate to the amount paid on the shares.
While most of the shares you purchase on the ASX will be ordinary shares, companies do offer preference shares and partly paid shares via the ASX. The quickest way to identify if a share is anything other than an ordinary share is through its ASX code. For example, every investment traded on the ASX has a unique identification code. The code for ordinary shares will have three characters. If the code has fewer than or more than three characters, it's likely the product is something other than an ordinary share.
2. Types of market sectors
The ASX classifies listed companies into 11 industry sectors based on their primary business activities following the Global Industry Classification Standard (GICS), as shown in the Table below. I have also included the ASX code (identifier) for each sector and the number of ASX-listed companies per sector. Just as Australian shares can be traded, you can also trade industry sectors using leveraged trading.
As you can see, the 11 sectors include energy, materials, industrials, consumer discretionary, consumer staples, healthcare, financials, information technology, communication services, utilities, and real estate. Understanding the different market sectors can help to diversify your investment portfolio and identify opportunities across various industries.
|No. of ASX Listed Companies
Commercial & Professional Services
|Automobiles & Components
Consumer Durables & Apparel
|Food & Staples Retailing
Food, Beverage & Tobacco
Household & Personal Products
|Health Care Equipment & Services
Pharmaceuticals, Biotechnology & Life Sciences
|Software & Services
Technology Hardware & Equipment
Semiconductors & Semiconductor Equipment
Media & Entertainment
Table: List of Sectors and Industry Groups
3. Trading hours on the ASX
The ASX operates Monday to Friday, excluding public holidays during the following times:
- Pre-open: 7:00 AM - 10:00 AM (AEST)
- Open: 10:00 AM - 4:00 PM (AEST)
- Post-close: 4:00 PM - 4:10 PM (AEST)
The pre-open is when you can place trades before the market opens. Once it opens, your trades will be executed in the market. If you change your mind about buying or selling a stock, you can cancel your order before the market opens.
It's important to be aware that the trades listed before marketing opening are not a true indication of trading volume or the price the stock will trade at because orders tend to change dramatically just before 10 a.m. due to emotional reactions by investors to news or current events. That's why I recommend you don't trade in the first hour of market opening. Given that most investors are looking to invest over the longer term, it's better to wait for the market to settle rather than be caught up in the emotions of the market.
You need to be aware that during opening hours, the value of stocks can fluctuate greatly based on a variety of factors such as company news, economic data (i.e. a change in interest rates or the value of the Australian dollar), and local, and global events. As such, you need to be careful when looking at the depth of the market during the day because it can give you a false sense of what is unfolding on the market as a lot of the trading volume by institutions, for example, is not visible to traders and investors. That's why it's important to have a solid investment strategy and an exit strategy, such as a stop loss to protect your capital.
4. ASX key market indicators
The two key market indicators for the ASX include the All Ordinaries Index (AORD) and the S&P/ASX 200 Index (XJO). The All Ordinaries is the oldest index in Australia, representing the performance of the 500 largest companies listed on the ASX by market capitalisation, while the S&P/ASX 200 focuses on the top 200 companies by market capitalisation.
No doubt, if you have watched the news, you would be familiar with these terms as they serve as benchmarks for the overall performance of the Australian stock market and can help investors gauge market trends and sentiment. These indices are also used by managed funds and institutions to gauge their overall performance.
Now that you understand the basics of ASX shares, let's look at how you can buy stocks on the ASX.
How do you buy Australian shares on the ASX?
Before you can buy stocks on the ASX, you'll need to set up a trading account. This process involves selecting a suitable broker, registering an account, and completing the verification process.
1. Choosing the right broker
A broker acts as an intermediary between you and the ASX to facilitate the buying and selling of stocks on your behalf. Your options include full-service brokers and online discount brokers.
Full-service brokers provide a comprehensive range of services, including personalised investment advice and portfolio management, but they typically charge higher fees. Online brokers, also known as discount brokers provide a more cost-effective solution, as they offer the cheapest way to buy stocks in Australia, but be aware that they may provide limited support and services.
When choosing a broker, you should consider the following factors:
- Fees: Compare brokerage fees, account maintenance fees, and other charges that may apply.
- Trading tools and resources: Look for platforms that provide user-friendly interfaces, research tools, preferably live market data, and educational material.
- Customer support: Reliable customer service is essential, especially for beginners who may require assistance with their trading activities.
You can find an ASX participant broker by visiting the ASX website.
2. Account registration and verification process
Once you've selected a broker, you'll need to register to open a CHESS-sponsored trading account, which ensures the shares are held in your name. You will need to provide your personal details, such as your name, address, contact information, and tax file number (TFN) and you will be required to provide identification documents to verify your identity.
In addition to a trading account, you'll need a linked bank account or margin lending facility to fund your share purchases. Many brokers offer these services, but you may also be able to use a separate cash account or margin loan from another financial institution.
After completing the registration and verification process, your trading account will be activated and you will be issued with a holder identification number known as a HIN. Every time you buy an investment on the ASX, it will be linked to your HIN.
How do I place my first order to buy ASX shares?
Before you place your first order, it's important to develop a trading plan to ensure you understand the risks you are taking and to increase your probability of a successful trade. You also need to conduct thorough research before deciding to invest in shares to ensure you protect your capital every time you trade.
Once you decide to place your first trade, you need to select the type of order, the number of shares you want to purchase and the price you are prepared to pay, and then monitor the order execution. Here's a step-by-step guide to help you place your first order to buy ASX shares.
1. Different types of orders and execution
There are several types of orders you can use when buying stocks on the ASX, which include:
- Market Order: This order type is executed at the current price in the market for a particular stock at the time you place your order. Market orders prioritise speed of execution over price control and are typically filled quickly.
- Limit Order: A limit order allows you to set a maximum price for purchasing a share. The order will only be executed if the share price is at or below your specified limit, providing you with more control over how much you pay to purchase the share.
- Stop Order: A stop order is triggered when the share price reaches a specified level, at which point it becomes a market order. This order type can be used to protect profits or limit losses.
When you buy a stock, you will pay at or near the asking price, which is the price the seller is willing to accept for selling their shares. If you sell a stock, you will receive a price at or near the posted bid price, which is the price the buyer is willing to accept for buying the shares.
It's important to understand that the last traded price on a stock does not always guarantee the price at which the market order will be executed. In fast-moving and volatile markets, the execution price may differ from the last traded price. The price will remain unchanged if the bid/ask price matches the last traded price.
2. Order settlement and trade confirmation
Once you've decided on the type of order, enter the details (ticker symbol, number of shares, and price, if applicable) into your broker's trading platform. Before submitting your order, you need to ensure you review it carefully to ensure it is accurate.
Once the order is executed, you will receive a trade confirmation or what is known as a contract note. This confirmation provides essential details about the transaction, such as the number of shares purchased, the execution price, and the brokerage fee plus GST to execute the trade. It's a good idea to get into the habit of checking your contract notes each time you buy or sell stocks.
Keep in mind that the settlement process for ASX trades typically takes two business days (T+2). This means you will need to have sufficient funds in your linked cash account or margin lending facility to cover the purchase within this timeframe. Failure to do so may result in penalties or the cancellation of your trade.
Once you place a trade, it's important to manage the stock until it is in profit. While your trading plan may indicate there is a high probability you will succeed, there is no certainty you will make a profit. It is only when the stock begins to rise in price that these risks diminish. Therefore, once you enter the stock market, you need to manage these risks.
Can I buy shares without a broker?
Now let's consider how you can buy ASX stocks without a broker. There are typically three ways including:
1. Initial Public Offering (IPO)
If a company lists on the stock exchange for the first time, it offers shares to the public as part of an IPO, which allows investors to buy via a prospectus. This document includes information about the business, such as an overview of the listing, its operations, financials, dividend policies, key risks, and investment, and industry overview. The risks of investing in an IPO can be high, which is why you should consider getting advice before you invest.
2. Dividend Reinvestment Plan (DRIP)
Many companies also offer dividend reinvestment plans, which allow investors to use the money they would otherwise receive as a cash dividend to purchase additional shares in the company. The main advantage of a DRIP is that it compounds your returns, particularly if the company is consistently performing because you are reinvesting your earnings. It is also a very effective form of forced savings, provided you know how to protect your capital in the event the stock turns and starts to fall away.
3. Capital Raising
When a listed company wants to raise more capital to expand its operations, it typically issues more shares to investors at a discount to the market or with some other incentive. This also requires the company to issue a prospectus, so that investors can understand the risks of buying the shares. It's important to read and understand the prospectus, as the offer may not always be to your advantage.
Now that you understand how to buy stocks and how to execute a trade, let's consider some of the more common questions asked by those new to the stock market.
Frequently asked questions about buying ASX shares
To help you better understand the process of buying ASX stocks and to make more informed decisions, below are some of the frequently asked questions.
1. How much money should you invest in stocks the first time?
There is no minimum amount required to start investing in ASX shares. However, it’s important to consider the brokerage fees and other expenses when determining how much place in each trade, which is particularly important if you have little money to invest. A higher initial investment can help you spread the costs and reduce the impact of fees on your returns.
2. Can I buy stocks on the ASX as a non-Australian resident?
Yes, non-Australian residents can buy ASX stocks. However, you may need to provide additional documentation during the account registration process and comply with any relevant tax obligations in your country of residence.
3. How much will I pay in brokerage to buy and sell stocks
When trading shares on the ASX, you will pay brokerage fees, which can vary significantly between providers. You will pay either a fixed fee or a percentage of the value traded. However, some online trading platforms now offer zero brokerage fees for certain trades or products such as Exchange Traded Funds (ETFs).
4. Are dividends automatically reinvested?
Dividends are not automatically reinvested unless you opt into a company's Dividend Reinvestment Plan (DRP). With a DRP, your dividends are used to purchase additional shares of the company instead of being paid out as cash.
5. How are profits taxed on stocks that are bought and sold on the ASX?
Profits from buying and subsequently selling stocks on the ASX are subject to capital gains tax (CGT) in Australia. The tax rate depends on your marginal tax rate and the duration of your investment. If you hold the stocks for more than 12 months, you may be eligible for a 50 per cent CGT discount.
6. Can I buy international stocks through the ASX?
To trade international stocks in Australia, you must use an ASX broker participant. Numerous online share trading platforms and brokerage firms in Australia offer access to international trading. That said, buying international stocks directly can be more expensive than buying shares on the ASX as you will incur additional costs such as currency conversion fees and foreign security custody fees. If you want to diversify into international shares, you may want to consider trading exchange-traded funds (ETFs) that track international indices.
7. What happens if a company I own shares in is delisted from the ASX?
If a company you own shares in is delisted from the ASX, you will still own your shares, but they will no longer be tradable on the exchange. The reasons for delisting can vary, including bankruptcy, acquisition, or failure to meet ASX listing requirements. The implications for shareholders will depend on the specific circumstances surrounding the delisting. If a company delists, you can visit the company's website to understand what has transpired.
Additional resources and further learning opportunities
To further expand your knowledge and skills in buying ASX shares, consider exploring the following resources and learning opportunities:
1. Education courses
Many online platforms offer courses and webinars designed to teach various aspects of share trading, from the basics to advanced strategies. Wealth Within also offers Australia's only government-accredited trading course that will support you to gain the knowledge, skills and confidence to trade in all market conditions.
There are numerous books available on investing and trading, suitable for beginners and experienced investors alike. Some classic titles include "The Intelligent Investor" by Benjamin Graham, "A Random Walk Down Wall Street" by Burton G. Malkiel, and "One Up On Wall Street" by Peter Lynch. You may also want to check out my bestselling book ‘How to Beat the Managed Funds by 20%’ and my latest award-winning book ‘Accelerate Your Wealth: It’s Your Money, Your Choice’.
3. Financial news and analysis
Stay informed about market developments and trends by regularly reading financial news and analysis from reputable sources like the Financial Review and announcements on the ASX.
4. ASX education resources
The ASX website offers a range of educational resources, including articles, videos, webinars, and online courses, covering various aspects of share trading and investing. Visit the ASX Education Centre at https://www.asx.com.au/investors/investment-tools-and-resources to explore their offerings.
Listen to podcasts that discuss share trading, market trends, and investment strategies. Wealth Within’ Talking Wealth Podcast, which has over 120,000 downloads a month, provides you with invaluable knowledge and education to get you started.
So there you have it. It's important to remember that your long-term success in the stock market comes down to educating yourself well and taking a disciplined approach to trading. By exploring different resources and learning opportunities, you will enhance your investment knowledge, make more informed decisions, and increase the likelihood of reaching your financial goals.
Dale Gillham is one of Australia's most respected analysts with over 30 years of experience working in the investment industry including banking, financial planning, share market education and professional trading. He is the best-selling author of multiple books and is passionate about ensuring clients receive the highest level of education in the stock market with Australia's only government-accredited course at the Diploma level.