Playing the share market can be a successful way to build your nest egg If you have the time, patience and a little guidance. Managing your own portfolio is possible if you follow these top ten rules.
Claire Doherty of the Australian Shareholders’ Association highlights the 10 ‘must dos’ for those considering, or already involved in, share trading.
1. Education is vital
Regardless of whether you are going to take professional financial advice or go it alone in choosing shares, spend some time getting a basic education about investment. Even for the purposes of selecting and instructing your financial advisor, an education is invaluable. As a start, the main market on which shares are exchanged in Australia is the Australian Securities Exchange (ASX). Shares are also called equities, units, stocks and securities.
You can access free or low cost independent investor education through:
• seminars and meetings run by the Australian Shareholders’ Association (ASA); go to www.asa.asn.au and click on ‘Events’
• Centrelink; go to http://tinyurl.com/yarveng
• FIDO, the consumer website of the Australian Securities and Investment Commission (ASIC); go to www.fido.gov.au
2. Make buy and sell decisions on the basis of company value
Investing in the share market should not be like a day at the track; don’t rely on a tip from the BBQ experts, or a hunch about a good thing. There are two fundamental questions that you need answered before you invest in a particular share:
• Is the company (and therefore the share) valued appropriately by the market or even undervalued?
• Will the company provide the return you require at the level of risk with which you are comfortable?
You’ll need a broker to trade. Full service brokers provide advice for a fee. Transaction only brokers just carry out the trade. Online brokers (such as E*TRADE and ComSec) and telephone brokers are relatively inexpensive.
For the ASX Find a Broker service and online courses on how to evaluate shares, go to www.asx.com.au and click on ‘Education & Resources’.
3. Do your homework
... or cheat, and get someone else to do it!
If you’re doing your own research, there’s no substitute for reading a company’s annual reports in order to understand past performance and forecast future performance. A good analysis should look back over the previous five years’ financial statements.
Note also that companies are required to announce sensitive information immediately to the market through the ASX Company Announcements Platform (CAP).
If you don’t have the time or the expertise to carry out your own analysis, there are lots of good services that offer research and analysis for a fee. Because many of these services, such as newsletters, are now online, fees can be relatively low and some offer free content and free trials.
Annual reports are publicly available on company websites.
To access the ASX CAP, go to www.asx.com.au and click on ‘Prices, Research and Announcements’ and then ‘Announcements’.
Popular investment newsletters/research providers include:
4. Understand your own appetite for risk and investment horizons
It is important to know both your appetite for absorbing losses that might arise from a higher risk investment and how long you intend to be invested. Long-term investors are less concerned about market cycles. You should be concerned about investing in quality companies, with good performance, which can withstand the cycle. Remember, when a listed company fails, shareholders rank lucky last behind the creditors.
5. Remember, there’s no such thing as a free lunch
It’s an old saying, but nonetheless true. There is a direct relationship between reward and risk. Investors who take bigger risks are rewarded with higher returns. Beware high-risk activities which are marketed as share-market products, but are in fact more akin to gambling, the most notable being contracts for difference (CFDs).
For more information about CFDs and other high-risk products, visit www.fido.gov.au (click on ‘About financial products’, then ‘Complex investments’).
6. Take care when you seek professional financial advice
Even with a trusted referral make sure you interview the advisor and are sure he/she understands your appetite for risk, what you want to achieve and your time frame.
Understand the fee structure the advisor uses. The best structure is fee for service, where you pay a fixed fee or hourly rate.
Avoid advisors who take commissions from product providers or charge a percentage of your assets. Commissions make an advisor more likely to sell you an unsuitable product. Under the percentage of assets payment system, it is in the interests of the advisor to inflate your assets in ways that might not be in your best interests, for instance, by having you borrow.
The Financial Planning Association (FPA) provides information on how to find and choose a financial advisor; go to www.fpa.asn.au.
7. Beware the unknown
In 2007-08 hundreds of mum-and-dad investors bought a little-known company called BrisConnections, at the price of $0.001 – the lowest price on the ASX – thinking it couldn’t go any lower. What they didn’t know was that the shares were only partly paid, meaning that a further $2.00 was payable by the owner on each share. Small investors suddenly owed millions of dollars on a small punt and some have lost their homes and businesses.
The BrisConnections security had a five-letter ASX code, not the usual threeletter code. This red flag should have led investors to the company website, which clearly identified the liability.
If you’re ever tempted to invest in something you don’t understand, remind yourself about BrisConnections.
8. Beware the spin doctors
Companies frequently report on ‘underlying profit’ or ‘normalised profit’ and other numbers that are different from those shown in the financial statements. These figures are often quoted in the media and can be misleading. To understand a company’s performance you should always look at the financial statements: the income statement, cashflow statement and the balance sheet. These are prepared in accordance with international accounting standards and are audited.
9. Care about good corporate governance
Companies listed on the ASX are required to advise shareholders on whether they have complied with the ASX Corporate Governance Council Principles and Recommendations and if not, why not. This report is in the company’s annual report. If a company reports non-compliance with any of the eight principles, and the reasons given are weak, give it a wide berth.
10. Be proactive
Shareholders in listed companies get to vote at company meetings on important issues such as who sits on the board, executive pay and changes to the constitution.
If you can’t attend the meeting, appoint a proxy (the Chairman or the ASA) on the form provided and return it to the share registry. If you are not sure how to vote, leave the voting blank and appoint the ASA, whose representative will vote your shares.
The ASA is a not-for-profit membership organisation formed to represent, protect and promote the interests of investors in shares, managed investments, superannuation and other financial investments. To appoint the ASA as proxy, go to www.asa.asn.au and click on ‘Companies’.
Join YOURLifeChoices, it’s free
- Receive our daily enewsletter
- Enter competitions
- Comment on articles