The sharemarket has made money for a lot of people lately, rising 58 per cent since its pandemic lows in March 2020.
So if you missed out on that run you might be thinking: Is now the time to join in?
Although it always looks like you have missed the party, starting now could help you build wealth well into the future.
But remember there is a difference between investing and taking a punt – you need to put some thought into what you are doing.
Investing: Time frames matter
“The first thing to think about is your time frame,” said Chris Morcom, adviser with Hewison Private Wealth.
If you want to save a house deposit in two years, you probably should avoid the sharemarket, as you will have no time to recover if it falls.
In this scenario, you should probably stick to a high-interest savings account.
Before you begin investing, it pays to be educated.
Read business and investment media outlets and look at blogs such as those offered by many advisory firms.
Read about stocks, Real Estate Investment Trusts (REITS) and Exchange Traded Funds (ETFs) and perhaps use an adviser.
Get to know your investment targets, too.
“If you are not just gambling on what will go up or down then you are interested in owning a piece of a business through the stockmarket,” said Roger Montgomery, principal of Montgomery Investment Management.
Mr Montgomery said before you invest in a company you should read:
- Annual reports
- Chief executive and chairman’s letters.
“Go back a few years to see whether they’ve implemented strategies they talked about earlier,” Mr Mongtomery said.
Once you have a feeling for where you would like your money to go then you need to think about how to get into the market.
“You need to look at the cost of investing,” Mr Morcom said.
In other words, how much you will pay per stock trade.
Some cheap options charge you as little as $10 per trade.
Most major brokers will charge you a flat amount to a trigger point, say $10,000, then a percentage – often about 0.3 per cent – after that.
Below are some cheap investment options for you to consider.
A new entrant to the market, Stake, will offer $3 trades on the ASX.
To sign up to online trading, you’ll have to connect a bank account to fund your purchases and accept your sale proceeds.
Individual stocks or collective options
A plethora of options are available for new investors but a significant choice boils down to whether you should buy individual stocks or collective options like ETFs or listed investment companies (LICs).
“The downside of shares, if you are a new investor with not a lot of money to invest, is you are very exposed to a company or a few companies,” Mr Morcom said.
Buying an ETF or LIC gives you a stake in a portfolio that is managed professionally.
LICs typically are managed by stock pickers who put in stocks they think will perform.
ETFs typically track indices, like the ASX 200 or the S&P 500 in the US.
They may also track sectors, like tech or green energy, and are a way to get exposure to markets that small investors couldn’t access by buying individual stocks.
But remember, if you buy an ETF, your investment will be driven by the major stocks in that particular index, like Apple, Google, Facebook and Netflix in the US.
In Australia, those stocks would be BHP, the big banks and Rio Tinto.
So learn a little about the big players in your ETF, and make sure you are comfortable with them before investing.
Do the maths
If you want to buy stocks, you need to understand some arithmetic.
Familiarise yourself with a few ratios, Mr Montgomery advises.
This includes the Price to Earnings ratio (PE), which will tell you how many years on current earnings it would take the company to earn its market capitalisation.
Typically, the Australian market averages a PE of about 17 times.
That means the average Australian-listed company would take 17 years to earn its market capitalisation through its usual business operations.
The current average PE in Australia is 28 – in other words, the market is expensive.
“Other important measures are earnings per share, gross profit margin and net profit margin,” Mr Montgomery said.
These figures give you an idea of the profitability of the company and the relationship between its share price and earnings.
When you familiarise yourself with those ratios, start to apply them to companies in which you are interested.
There are different schools of thought on investment style.
Mr Morcom says that history shows few fund managers outperform the general market, so buying into an ETF makes sense.
Mr Montgomery says he is an active manager, but that this is a skill that needs to be learned.
“In Australia there are fund managers that consistently outperform the market,” he said.
They are LICs and by investing in them and following their performance and investment strategy you will learn about active investing yourself, Mr Montgomery said.