What Are Shares and How Do They Work?
Understanding Share Ownership
When you invest in shares, you're buying a small piece of ownership in a company. Each single share represents one unit of ownership, making you a partial owner or 'shareholder' in that business. The Australian Securities Exchange (ASX) lists over 2,300 companies with a combined market capitalization exceeding $2.9 trillion, giving investors plenty of options to choose from.
The ASX market structure is dominated by the financial sector, comprising approximately 32% of the ASX 200 index, followed by materials (23%) and healthcare (11%). This sector weighting differs significantly from global indices, making the Australian market unique.
When you own shares, you're entitled to vote on certain company decisions and potentially receive a portion of the company's profits. However, to buy or sell shares on the ASX, you must conduct transactions through a licensed broker who acts as an intermediary between you and the market.
How Shares Generate Returns
Shares can generate returns for investors in two primary ways:
Capital growth: This occurs when you sell shares at a higher price than what you paid for them. The difference represents your profit or capital gain.
Dividends: These are payments made by companies to their shareholders, typically distributed twice yearly from the company's profits. For example, major banks like Commonwealth Bank often pay reliable dividends, with an average yield of 4.3% compared to 2.8% from term deposits.
It's important to understand that companies have no obligation to pay dividends. However, many established businesses choose to distribute a portion of their earnings to shareholders as a way of sharing their success and attracting investors.
When placing share orders, you can use market orders (executing immediately at current prices) or limit orders (only triggering at your specified price points). All transactions are settled via the CHESS (Clearing House Electronic Subregister System), which manages electronic share registries and ensures secure ownership records.
Why Should You Consider Investing in Shares?
Shares vs. Savings Accounts
While savings accounts and term deposits offer security with lower risk, they typically provide modest returns. The ASX 200 has delivered 9.2% annualized returns over the past 20 years, compared to just 3.1% average interest from savings accounts.
As Dr. Shane Oliver, AMP Capital Chief Economist notes, "Equities outperform inflation by 5-6% annually over 30-year periods." This significant difference in long-term performance is why many investors allocate a portion of their wealth to shares.
That said, financial experts recommend maintaining some money in both asset classes. Savings accounts provide liquidity and stability, while shares offer growth potential. This diversification helps balance risk while pursuing higher returns.
Historical data shows shares recover differently from market downturns. For example, the market rebounded from the 2020 pandemic crash much faster than the 2008 Global Financial Crisis, demonstrating the resilience of equity markets over time.
Setting Your Investment Goals
Before learning how to invest in shares, determine your investment timeframe:
Short-term: 1-3 years
Medium-term: 3-7 years
Long-term: 7+ years
Your timeframe affects your investment strategy and risk tolerance. Longer timeframes generally allow for more aggressive approaches as they provide time to recover from market downturns.
You'll also need to decide your initial investment amount and whether you'll make regular contributions. Research shows that regular contributions through dollar-cost averaging can reduce portfolio volatility by up to 38% compared to lump-sum investing.
How Much Money Do You Need to Start Investing?
Minimum Investment Requirements
Most brokers require a minimum first trade of at least $500, known as a "minimum marketable parcel." This requirement helps ensure transaction efficiency on the market. While the ASX suggests starting with at least $2,000 as a general guideline, research from micro-investing platforms indicates that 73% of new investors actually begin with less than $500.
The minimum amount needed varies depending on your chosen investment platform. Traditional brokers typically require higher minimums than newer micro-investing platforms, which cater to beginners with smaller amounts to invest.
Understanding Brokerage Costs
Each share transaction incurs a brokerage fee on top of the actual investment amount. These fees vary widely across providers, ranging from $5 for micro-investing platforms to $29.95 per trade for full-service brokers.
The impact of these fees is proportionally higher on smaller investments:
- A $5 brokerage fee on a $600 investment represents 0.8% of your investment
- A $19.95 brokerage fee on a $5,000 investment represents only 0.4%
This difference means smaller investors need to be particularly conscious of transaction costs, as brokerage fees can significantly erode returns on modest investments. Studies show brokerage costs consume approximately 2.4% of $500 portfolios versus just 0.6% for $5,000 investments.
Starting Small with CommSec Pocket
For those looking to start with smaller amounts, platforms like CommSec Pocket allow investments with as little as $50. The app offers access to ten themed investment options, including technology, sustainability, and global leaders.
CommSec Pocket users demonstrate 29% higher retention rates than traditional platforms, suggesting that starting small with a user-friendly interface helps new investors develop sustainable habits. The platform also provides educational resources like tips, videos, and articles to help beginners understand market dynamics insights.
How Do You Choose Which Shares to Buy?
Research Fundamentals
When selecting shares, start with companies in industries you understand. Familiarity with a sector gives you an advantage in evaluating a company's prospects and competitive position.
Review company annual reports and financial statements available on the ASX website. Look for consistent revenue growth, healthy profit margins, and manageable debt levels. Consider using discounted cash flow modeling to estimate a company's intrinsic value and determine if its shares are fairly priced.
Assess future demand for the company's products or services by examining industry trends and technological developments. Companies with strong intellectual property or unique market positions often have better growth prospects.
Pay attention to a company's management team and corporate governance practices. Strong leadership and transparent operations can significantly impact long-term performance.
Price Considerations
A common misconception among new investors is that "cheap" shares represent good value. However, share price alone tells you very little about a company's true worth. What matters is the relationship between price and value.
So-called "penny stocks" trading at 10-20 cents per share often carry higher risk due to their smaller market capitalizations and sometimes less established business models. They frequently experience more volatile price movements and may be less liquid than larger companies.
Focus on the potential percentage increase in value rather than the number of shares you can purchase. Owning 100 shares of a quality company is typically better than owning 1,000 shares of a speculative one.
When analyzing price movements, technical indicators like the Relative Strength Index (RSI) can help identify overbought or oversold conditions. The 200-day moving average is another useful tool for gauging long-term price trends.
Warning Signs to Watch For
Be cautious of companies with consistently falling share prices. While occasional price drops are normal, persistent declines often signal underlying problems with the business model, financial health, or industry outlook.
Extremely rapid price growth without corresponding improvements in business fundamentals may indicate overvaluation or speculation rather than sustainable growth. Such situations often lead to painful corrections.
Many experienced investors implement a "percentage stop" strategy, setting a threshold (typically around 15%) below their purchase price. If a share falls below this level, they sell to limit potential losses. This disciplined approach helps prevent emotional decision-making during market downturns.
Watch for warning signs in financial statements, such as declining profit margins, increasing debt, or deteriorating cash flow. Forensic accounting techniques can help detect potential irregularities in company reports that might indicate deeper problems.
How Do You Learn About Share Investing?
Educational Resources
The Australian Government's MoneySmart website provides comprehensive, unbiased investor education materials. Their resources cover everything from basic concepts to more advanced investment strategies.
The ASX offers a dedicated share investing education section with webinars, courses, and market updates. According to recent statistics, 68% of ASX investors complete at least one educational module before they begin trading, which correlates with better long-term outcomes.
The CommBank app delivers market news and investing content tailored to different experience levels. Their resources help users understand how economic factors like interest rates, inflation, and government policies affect share prices.
Many investors benefit from participating in the ASX Sharemarket Game, which allows you to practice trading with virtual money in real market conditions. This risk-free environment helps build confidence before investing actual funds.
Building Your Knowledge
Educate yourself about how economic factors affect company performance. Understanding the relationship between interest rates and various industry sectors can help you adjust your portfolio during different economic cycles.
Research different industries and market sectors to identify areas of opportunity. The financials, materials, and healthcare sectors dominate the ASX, but smaller sectors sometimes offer higher growth potential.
Start with companies in sectors you already understand through your professional experience or personal interests. This familiarity gives you an advantage in evaluating business models and competitive positioning.
Make a habit of regularly reviewing financial news and market updates. Staying informed about global and local economic trends helps you make better investment decisions and respond appropriately to market events.
How to Start Investing in Shares
Opening an Investment Account
To begin investing, you'll need to open a brokerage account. Through the CommBank app, you can easily browse investment options by logging in and tapping the 'Investing hub' tile from your dashboard.
Select the type of investing account you want to open based on your needs. Options typically include individual accounts, joint accounts, and sometimes specialized accounts like those for children or trusts.
During the account setup process, you'll need to provide identification documents and financial information to comply with regulatory requirements. All reputable platforms implement strong security measures, including two-factor authentication, to protect your investments.
Be aware that different accounts offer varying features, such as CHESS-sponsored accounts (where shares are registered directly in your name) versus custodian arrangements (where the broker holds shares on your behalf).
Making Your First Investment
Determine your investment budget and strategy before placing any orders. Decide whether you'll invest a lump sum or make regular contributions through dollar-cost averaging.
Research potential companies using available resources like broker research reports, company announcements, and financial statements. Look for businesses with strong fundamentals, competitive advantages, and reasonable valuations.
When placing your order, decide between market orders (executed immediately at the current price) or limit orders (executed only at your specified price or better). Limit orders provide more control but may not execute if the market doesn't reach your price.
After investing, monitor your holdings regularly but avoid constant checking, which can lead to emotional decision-making. Quarterly reviews are often sufficient for long-term investors.
FAQs About Share Investing
What risks are involved with share investing?
Share investing involves several types of risk:
Market risk: Share prices can fall below your purchase price, resulting in losses. Market-wide downturns can affect your entire portfolio, as seen during the 2020 pandemic when the ASX 200 fell approximately 37% in just one month.
Company-specific risk: Individual companies may underperform or fail due to poor management, changing industry conditions, or competitive pressures.
Liquidity risk: Smaller companies' shares may be difficult to sell quickly without affecting the price.
Concentration risk: Holding too many shares in a single company or sector increases your vulnerability to specific downturns.
Portfolio stress-testing using Value at Risk (VaR) models can help quantify potential losses under different market scenarios. Diversification across different companies, sectors, and asset classes remains the most effective risk management strategy.
How do I track my share investments?
Most brokers provide online platforms or mobile apps that allow you to monitor your portfolio in real-time. The CommBank app offers comprehensive investment tracking capabilities, including performance metrics and notification features.
Company announcements and financial reports provide updates on business performance and strategic direction. These documents are available through your broker's platform or directly from the ASX website.
Consider setting up alerts for significant price movements to stay informed without constantly checking your investments. Most platforms allow you to customize these notifications based on your preferences.
For tax purposes, maintain records of all transactions, including purchase dates, prices, and any associated costs. These details will be essential when calculating capital gains tax liabilities if you sell shares.
What tax considerations apply to share investing?
Capital gains tax (CGT) applies when selling shares at a profit. If you hold shares for more than 12 months, you may be eligible for a 50% CGT discount, significantly reducing your tax liability.
Dividend income must be declared on tax returns, including any attached franking credits. The Australian dividend imputation system allows shareholders to receive credits for tax already paid by the company, potentially reducing their personal tax liability.
The ATO's recent guidelines clarify that newer investment types like NFTs (non-fungible tokens) and cryptocurrency are also subject to capital gains tax, though with some specific considerations.
Tax implications vary based on individual circumstances, including your income level, investment structure, and holding period. Consider consulting a tax professional for personalized advice, especially if you have a substantial portfolio or complex investments.
Understanding the difference between investing vs speculating is crucial for anyone learning how to invest in shares. Furthermore, familiarizing yourself with timeless investing rules can help you avoid common pitfalls. For those interested in specific sectors, a comprehensive mining stocks guide can provide valuable insights, while staying informed about systematic investing trends can help you adapt your strategy as markets evolve.
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