Getting started in the world of investing can sometimes feel like you've jumped into the deep end. It can seem like a big, scary place filled with confusing jargon and big risks. This is especially true when you're earlier in your journey, and you're wondering “what is the stock market?”, or “ what should I know before getting started with investing?".
But here's the good news: it doesn't have to feel overwhelmed. You see, understanding the stock market is kind of like learning to ride a bike. Once you get the hang of it, you'll be off to the races.
That's where this resource comes in! Let this article be your set of training wheels. We're going to walk (or ride) you through the basics of the stock market in Australia - what it is, how it works, and what you need to know before diving in. By the end of this, you'll feel more confident in taking off those training wheels and starting your investing journey!
What is the stock market and how does it work?
The stock market can feel like a maze at first. There's a flurry of numbers, charts, and terms that seem like a whole new language. And here's a heads-up: rushing in without understanding could lead to more financial losses than wins. So, what exactly is the stock market?
You know how there's a marketplace for nearly everything? Like a fruit market for apples and oranges, for instance. Similarly, the stock market is a giant marketplace for buying and selling pieces of companies, which we call "stocks" or "shares". When you buy a stock, you're buying a tiny slice of that company. You become a part-owner, or a "shareholder".
But how does it work,? Well, imagine you're at a fruit market. The price of apples might change based on how many people want them and how many are available. The same goes for stocks.
If lots of people want to buy a particular stock and not many want to sell, the price goes up. On the other hand, if more people are selling than buying, the price goes down. This whole process is done through something called a "stock exchange", which is a a place where buyers and sellers meet to trade stocks.
When you're ready to jump into the stock market, you'll need to open a special account with a stockbroker, or brokerage platform. These give you access to the stocks you want to buy.
What are the different stock market investing types in Australia?
There is a wide variety of options when it comes to stock market investing types. Each investment has its own features, benefits, and potential returns. If you stick to what's familiar without exploring, you might miss out on some thought-provoking learnings.
So, let's explore the different stock market investing types in Australia:
- Individual stocks. When you buy individual stocks, you're buying a piece of a company. It's like you're buying a small part of a business. The company's success or failure impacts your investment. The price of your stock, known as the share price, can rise or fall depending on how well the company does.
- Exchange-Traded Funds . Exchange-Traded Funds, or ETFs for short, are like big baskets filled with different stocks or bonds. Within the Pearler Community, ETFs are one of the popular ways to invest passively This means you're not trying to beat the market, but rather trying to grow your money along with the market.
- Managed funds. This type of investment involves a professional stepping in. This pro, known as a fund manager, takes everyone's investments and uses them to buy a mix of assets. They do all the work, making all the buy and sell decisions. You'll typically find managed funds in places like stock mutual funds or bond mutual funds.
- Bonds. When you invest in bonds, you're lending your money to a company or the government. They promise to pay you back with a bit of interest. It's a bit like giving a friend a loan and them promising to pay you back with a little extra for your trouble.
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CHESS-sponsored investing.
CHESS-sponsored investing is specific to Australia. It's a system that keeps track of who owns what shares. Think of it as a big computer diary working for the Australian stock market, also known as the ASX (Australian Securities Exchange). Its job is to keep an eye on all the shares in the market. It makes sure the shares safe and working well. When you use a CHESS-backed account to start investing, your shares are processed through a stock broker. They also make sure your shares are correctly put under your name.
With a CHESS-backed account, you can start to buy shares of your own. You can buy pieces of individual companies, and also other investments like ETFs and LICs. - Custodial investing. Custodial investing is all about safety. You can imagine custodial investing as hiring a personal assistant for your investments. This assistant, known as a custodian, is there to take care of your investments, making sure they're safe and well-managed. The custodian makes sure everything is handled correctly, from buying and selling shares, keeping records straight, and dealing with dividends. Even though you're putting money into shares, you won't be the direct owner. The custodian's name is put down as the owner on the ASX list. But don't worry, they're just holding them in your place. They give you a special ticket that says you have an interest in these shares.
- Micro-investing. Micro-investing involves purchasing small amounts of investments, frequently. You don't need a pile of cash to begin with this investment; just a few dollars can get you started.You can do micro-investing via managed funds. When you put money into a managed fund, your money joins up with other people's money. Then, that total amount is invested based on some specific rules. When you put your money into a managed fund, you get something called 'units'. These 'units' are like pieces of the pie. Each unit is a slice of the total value of the fund.
When you're first starting out, the differences between the latter three can sometimes feel confusing. To steer you in the right direction, we've created an article comparing CHESS-sponsored vs custodial vs micro-investing vs micro-investing.
Remember, investing in the stock market can be exciting. But, like a ride on Wall Street, it can also have its ups and downs. Each investment type has its own advantages and drawbacks to account for. It's important to conduct research and keep an eye on factors that impact stock prices like company news or market volatility.
Crafting your investment blueprint: active vs passive investing and long-term vs day trading
See, there are many ways to invest your money. But without the right knowledge or plan, you might end up picking an investment that's not right for you. This is what we mean by inappropriate or misunderstood strategies. Like taking a road trip without a map, you might end up somewhere you don't want to be.
Before you dive into the stock market, you should learn about the different methods to craft your investment blueprint.
Active investing
Active investing involves buying and selling individual stocks frequently. This is done to try to outperform the stock market. Active investors put in a lot of work in an effort to win at this game. They aim to buy stocks when they're low-priced and sell them when they're high-priced.
Active investors get a kick out of studying the market, analysing data, and timing their trades just right. They aim to use clever tactics to make the most out of the stock market's ups and downs. This method can be exciting, but also quite risky.
Passive investing
With passive investing, you're not trying to outperform the market. Instead, you're going with the flow. It's a laid-back approach that the community prefer, and they have some great reasons why.
Passive investors put their money into lots of different investments like ETFs and mutual funds. They then trust in the long-term growth of the market.
Passive investing could be a good fit if you like the idea of keeping things simple. It's liked by investors who think it's tough to always beat the stock market. This method is generally considered less risky than active investing. However, it's important to remember that ALL investments carry risks.
Day trading
Day trading is like a high-speed car chase in the stock market. You buy and sell stocks on an hourly basis. People who do this are called day traders.
Day trading can involve a lot of research. Day traders are constantly trying to find out what will make stock prices go up or down. Their goal is to make a profit from the small price changes that happen throughout the day.
As a sub-class of active investing, day trading can also feel exciting whilst yielding high risks. You can experience rapid changes in your investments. One minute you're buying a stock, and a few hours later, you're selling it. This is why it's fast-paced and can feel like a race.
Long-term investing
Long-term investing is about playing the slow and steady game. You invest in stocks, ETFs, or mutual funds and hold them for many years, or even decades.
When you're a long-term investor, you're investing with the future in mind. You might be investing for your retirement, a house, or even a child's education. It's a bit like planting a tree: you plant the seed (or, in this case, the investment), water it, and let it grow over time.
Investing for the long term also means you're not always trying to beat the market. You're not worried about the hourly ups and downs of stock prices. This is a part of investing passively, which is a strategy many in the Pearler Community opt for.
Over a long enough timeframe, despite the market's ups and downs, your investments can grow in value. And whilst there are no guarantees in investing, time in the market has historically served long-term investors as well.
Each of these strategies has its place in the investing world. Both active and passive investing approaches are used by many successful long-term investors. Day trading, while riskier, can be profitable for some, although it requires much more research. It's all about understanding your risk tolerance and financial goals.
What are some advantages of each investment strategy?
Here's a quick rundown of some advantages of the different approaches to investing:
Active investing
- It's hands-on. You get to call the shots, choosing exactly which stocks you buy or sell.
- There's potential for big wins. With informed and smart choices, you could score higher returns than the overall market.
Passive investing
- It's low stress. You just buy funds that track a market index, sit back, and let the market do its thing.
- Lower costs. Passive funds often have lower fees than active ones, leaving more of your money to grow.
Day trading
- Fast money. If you make smart trades, you can pocket the profits the same day.
- Excitement. It's a thrill, watching stock prices and making quick decisions. It keeps the adrenaline pumping!
Long-term investing
- It's patient. You buy stocks and hold onto them over a long period of time.
- You can ride out the storm. The market might go up and down every day, but over the long run, it has a tendency to go up.
What are some potential drawbacks of each investment strategy?
Every investing approach has its own risks and downsides. Let's look at some potential drawbacks for each strategy:
Active investing
- It's time-consuming. Active investing needs a lot of time for research and trading.
- Fees can add up. Every time you buy or sell shares, the fee for each transaction can accumulate.
Passive investing
- Risk is still present. While passive investing has historically posed less risk than active investing, no-one can predict how the market will perform in the future.
- Slow and steady. Returns can be slow in coming, which some investors might find boring or frustrating.
Day trading
- It's risky. Prices change quickly, and you can lose money fast.
- High stress. Making quick decisions all day can be stressful.
Long-term investing
- It requires patience. You might have to wait years to see significant returns.
- Market downturns. If the market goes down, your investment value might drop for a while.
Remember: it's always wise to consider the potential benefits and downsides and see what fits you the best. After all, investing is about what works for you!
Beginner-friendly resources for Australia's stock market
There are heaps of resources that can help you with what you should before getting started with the stock market in Australia. Let's go through some of them!
(Note: We're not getting paid to suggest these resources. We're sharing them because we think they're helpful.)
Investing courses
These courses can provide a structured way to learn about investing basics.
- The Rask ETF course is a free online class that's all about Exchange Traded Funds (ETFs). You'll learn the basics of ETFs, how to buy and sell them, and even how to create your own ETF portfolio.
- The Rask Share 101 course is a go-to online class for understanding shares. It simplifies complex share concepts, teaches you how to start investing, and guides you to make informed decisions.
Books
Books can offer insights from experienced investors, including topics like investing strategies.
- "The Barefoot Investor by Scott Pape is a popular personal finance book in Australia. It gives easy-to-follow steps for managing money and starting to invest.
- "Girls That Invest" by Simran Kaur is a great read for new investors. It explains the basics of investing in a fun, engaging way. It's like getting investing tips from your smart, approachable friend who wants you to succeed!
Podcasts
Podcasts can be a flexible learning method, covering various aspects of investing you can listen to anytime, anywhere.
- Get Rich Slow Club podcast aims to empower you to go from beginner to confident investor. It break downs diverse investment topics in a fun, easy-to-understand way. On this podcasts, you'll hear discussions on how to start building your wealth.
- Aussie FIRE podcast is an audiobook which explores how to achieve financial independence in Australia. With tips on saving, investing, and reaching financial goals, it covers every aspect of the long-term investing journey. As a disclaimer, Pearler was responsible for publishing this free resource.
Investing calculators
Investing calculators are handy tools that can help you understand how your investments might grow over time.
- Pearler's compound interest calculator is a handy online tool that shows you how your money can grow over time with compound interest. You just pop in your investment details and it does all the math - super easy!
A lot of these are interactive tools to make your learning about investment fun and helpful. So, take your time and explore these resources. Each one can help you understand more about investing, so you can start your journey in the stock market with confidence.
Wrapping Up: Your Unique Journey in the Stock Market
We've sure taken a big dive into the world of the stock market in Australia in this article. The one key thing to take away from all this is that investing, while potentially rewarding, does carry risks. With this in mind, it pays to choose the investing style that best matches your risk profile.
Also, remember, there's no single "best investment" that fits all. It's crucial for you to explore, learn, and discover the right investment that matches up with your personal goals and comfort level with risk.
Your journey into investing is unique to you. Take your time, do your homework, and find what investment strategy fits you well. Keep learning and stay curious. After all, every expert was once a beginner.
Happy investing!
