Investing in the stock market can be daunting, and is often an expensive learning curve. This article gives you an overview on how to invest in the stock market, what shares are, how to buy shares, how to research a company, etc. It won’t make you an expert, but it’ll give you the basic knowledge to get started.
How Do Shares Work?
When you buy shares (AKA stock), you’re actually buying a percentage of that company. There are different types of shares (that give different rights, such as shares with no voting power), but fortunately (as far as I’m aware) ordinary shares listed on the NZX and ASX all have the same rights.
Fun tip: If you’re buying shares in a non-listed company (in other words, a company not listed on the stock exchange), you’ll want to check the Company Constitution and shareholders agreement to see if you have the same rights as everyone else.
When a company is created (and registered with the Companies Office), that company decides how many shares it wants the company ownership structure to be split into. The owners are then recorded at the Companies Office and updated when shares are bought and sold.
When a company lists on a stock exchange, it’s no longer feasible to constantly update the Companies Office so the company hires a share registrar, such as Link Market Services or Computer Share. The share registrar will be connected to the stock exchange, and automatically update when shares are bought or sold.
Buying Shares On The Stock Market
Finding A Stock Broker
The first thing to do when buying shares is to find a broker. Brokers broadly fit into one of two categories: Those with value-add services and those that provide direct access.
If you want to buy shares in New Zealand and don’t want a value-add broker, your options are:
- Sharesies – I understand that you don’t own the shares directly, instead they are held in a trust. This means that you can have a childs account, which I don’t think is otherwise possible in share ownership. See here for the cost of Sharesies.
- ASB Securities – No annual fees, you own the shares outright, just pay for the trades you make.
- ANZ – Same as ASB but with a slightly different fee structure.
If you want value-add services such as investment advice or drip feed automated selling for large volumes of shares, your options are:
- Forsyth Barr
- Craigs IP
- Hamilton Hindin Greene
- A full list is available here: https://www.nzx.com/services/market-participants/find-a-participant
Once you’ve signed up with a broker, you can then make a purchase through the broker. The next step is to choose a company to buy shares in.
Choosing A Company To Buy Shares In
The first step to choosing a company to invest in is to get a list of companies, which you can do from the ASX or NZX website. Once you’ve picked a company that you’re interested in, you’ll need to start researching that company.
How To Research A Company
To research a company, you’ll want to go to the respective stock market’s website (ASX or NZX) and search for the company. From here you’ll have access to all of the company’s announcements. Read through these, particularly the annual results and financial statements.
You should be looking to see if the director’s historic forecasts matched the following years results, to get a clue about how much credence should be put in this current year’s forecast. You should also be checking the finances to try to understand what’s going on.
Next take a look at the Companies Register to see who the major shareholders are and do a bit of research on them. Check up on the directors while you’re there too. Take a look into their other (including past) endeavors.
Next, have a look at some forums to see what others think or know that you might not. A great resource for the NZX is ShareTrader (There is one poster named “Beagle” who I particularly like, though there are many other wise folk there). A good resource for the ASX is HotCopper, though HotCopper seems to be comprised of a higher percentage of people who are blindly fanatical about particular stocks, so the conversation is less balanced.
Beware of any up-ramping or down-ramping of shares on stock market forums, as some posters may have their own agenda. Also be aware that not everyone on these forums is an expert.
Finally, throughout all this, you should keep abreast of the news, and try to predict what might happen to the future of these companies. Factors like government policy, interest rates, foreign exchange rates, and property values play a significant part to influence the value of large companies on the stock market. Stats NZ is also another good source of broader economic data.
Once you’ve found a company that you think you might like to buy shares in, you’ll need to decide how much they’re worth – because if you think that they’re selling for more than you think they’re worth, the only way to make money on those shares is if there’s a Greater Fool.
I won’t go into how to value shares in this article because it’s a very big subject, but valuing shares is a vital part of investing and I highly recommend you do some research into this. Check out this article on how to value shares to start you off, and remember that there are two ways to invest, as either an Investor in shares (who holds for a long time) or a Share Trader (who does lots of trades [including stock shorting] to make money over a shorter period of time). The later type of investor pays capital gains, but has the opportunity to make a lot more money. Share Traders typically use Technical Analysis (TA), while Investors typically use Financial Analysis (FA).
Making Your First Share Purchase
Once you’ve decided what shares you want to buy and how much you want to pay, you’ll probably want to check the Market Depth before putting a bid in. The Market Depth tells you how many buyers and sellers there are, and what they are offering to pay / receive for their shares. This gives you a clue but beware that more often than not, there’s some manipulation going on there.
Once you’ve made a bid and you have waited until the bid has been accepted, you should receive something from the registrar in the mail (the registrar gets your details from your broker). Once you receive this, it will have your unique ID on it, which you can then use to register on the registrars website. This lets you update your details so you can receive company information through email, update your bank and tax details for dividend payments, sign up for Dividend Reinvestment Programmes (DRP), etc.
Once you’ve learned how it all fits together, the next thing to do (which is really the first thing to do, but you probably won’t know how until you have some experience) is to decide what your investment goals are and make an investment strategy. For example, do you want to buy some shares so you can save up some money for a house; are you looking for long term investment income; or are you looking to exit your growth shares in X years so you can buy shares in stable dividend paying shares for retirement; or perhaps you’re rich and looking to use the stock market to spread your risk? Whatever your investment goals are should be defined first, because these will affect your purchasing decisions.
I hope this article helps start a few people off on their journey to becoming richer with shares. Remember that this article is just a quick outline, and you’ll have to do a lot of your own research.