Fearless Girl in front of bull to show buying shares

Buying Shares Part 3: The How

This is the third post in my three-part series on buying shares. If you haven’t read the first or the second post then head over there now. Those posts cover the why and the what of buying shares.

This post is going to focus on the practicalities of implementing your portfolio. Fun!

Choosing A Broker

The first step you need to take when buying shares is to open a brokerage account.

While you can technically buy, sell and hold stock without a broker, it’s definitely a lot more complicated. When you buy or sell stock directly from a company it is held as Issuer Sponsored. In this situation, the company records your ownership directly on their share registry. This usually happens when you buy at initial public offering (IPO) or through a employee benefit sheme. Where the stock is bought through a broker and held by them (on your behalf) it is called CHESS sponsored. CHESS is a sub-registry managed by the ASX.

Buying and selling through a broker on CHESS, is much easier because it is all done electronically. It also means that you have access to a large volume of buyers and sellers. This improves liquidity and pricing. Plus settlement is quicker and easier (less admin and paperwork) than it being done manually by the issuer.

Online vs Full Service

The main difference between online trading platforms versus full-service brokers is in the service you receive. It’s like comparing a high-end salon with Just Cuts. If you want the full service, such as stock recommendations, research reports and having all the actual buying and selling (and admin) done for you, then a full-service broker can be worthwhile.

However, if you’re just starting out and want to learn how to do it yourself, don’t need the research or hand-holding then an online trading platform will probably save you a whole lot of cash.

Fees & Charges

Regardless of whether you choose an online platform or a more traditional stockbroker, it’s important to look at the costs. The structure and amount of fees can differ between each provider. So make sure you do your research before you open your account.

The most common type of charge, with any broker, is a brokerage fee. This is a fee charged per transaction that you make. It could be quoted at a flat dollar fee, a percentage of trade value, or a combination of both. When deciding on the best pricing structure for you consider how often you will be trading and the value of those trades.

While less common, some platforms can also charge an account keeping fee(common with micro-investing apps), custody fee (more common for directly held international stock) or an admin fee. Ensure that you read the PDS or account opening documentation to know what you’re agreeing to.

A note for starting small. If you are investing smaller amounts (i.e less than about $5,000) or anticipate making multiple small transactions then you may want to consider a micro-investing app. It may be more cost-effective than a broker.

There are plenty of credible websites which make it easy for you to compare (up-to date) costs and offerings for online share trading accounts, such as Canstar.

Place your trades

Once you’ve decided on your broker, it’s time to start actually buying shares (drumroll please…)

When you log into your account, it is useful to familiarise yourself with it as much as possible before placing any trades. Many online platforms will have tutorials or how-to guides which will help you navigate their particular platform. While it can look a little scary or overwhelming at first, remember that just like learning anything new, it takes time. You’re smart and capable, so don’t let the tech scare you. Having said that, most platforms are designed to be user-friendly, so hopefully you’ve found one that works for you.

The next thing you’ll need to do is transfer money into your cash account. Most brokers will require you to hold the cash in an account held with them. Although some may be able to debit it directly from an external account. Either way, make sure you have enough in your account to cover the cost of the trade. Otherwise the trade will fail, or you will be charged a fee.

A word on settlement. This is the day where the cash and ownership of the shares transfers between the buyer and the seller. On the ASX the standard settlement period is T+3 which is simply three days after the day of the trade. Some other stock exchanges may have different settlement periods, so if you’re trading on another exchange keep that in mind.

Learning the Lingo

Some terms you might see when placing a trade:

Bid: is the price someone (like you) is willing to pay for a share

Offer: is the price someone is willing to sell their shares for

Market order: is an order to buy or sell a share right away

Limit order: is an order to buy or sell a share at a certain price

Ticker: is the (usually) three or four letter code that denote the share you want to buy

Remember, if at any point you feel confused or overwhelmed, just stop and regroup. There’s always Investopedia if you don’t understand any term you come across – seriously, it got me through university!

When placing a trade, you will first need to know the ticker, the number of shares you want to buy and decide on whether you want to accept the market price or create a price limit. For most highly traded stocks, it’s pretty safe to place a market order and assume that you will get very close to the current offer price.

For example, if you want to buy $5,000 of Vanguard Australian Shares ETF and the offer price is $97.20, then you would divide 5,000/97.20, keeping in mind that you also need to have enugh to cover the brokerage cost. In this case you would be buying 51 shares at market and the total cost of settlement would be (very close, if not exactly) $4,977.20 including $20 brokerage. Note that some platforms will allow you to put in the dollar amount rather than the share price so check if that is possible too.

If you’re placing your portfolio for the very first time, keep in mind that depending on the value, you may not want to place it all on one day. Spreading the implementation of your portfolio out over 1,2, 3 or even 6 months can be a wise move in order to smooth out price risk. The timing, however, will depend on your personal tolerance for risk.

Rebalancing

A lot of people ask me: how often should I look at my shares? Well, there’s two answers to that question and it really just depends on your personality.

First up, remember what I told you in my first article – you’re investing to grow your wealth slowly and steady (like the tortoise) not to get rich quick. Trust me, this is the best strategy because you’ll notice that while the share market goes up and down in the short term, it will go up overall in the long term.

Also, if you’ve put in place a ‘top down’ strategy as I explained earlier, with plenty of diversification, you should be fine to ‘set and forget’. In this case you really only need to check every three to six months.

On the other hand, there can be value in looking at your portfolio often, firstly as a way of learning more about the way the market moves (sometimes quite violently!) and also getting yourself used to that. Think of it as a type of exposure therapy.

Whatever your personality type, it’s still important to review your portfolio. This is to ensure that it’s still in line with your target asset allocation. In times when one asset class or individual asset outperforms the other (which is usual in a diversified portfolio) then it may be necessary to buy or sell to bring it back into balance. You will likely also be adding to your portfolio over time, so this may be a good time to rebalance your portfolio.

Phew, we did it! Three parts on the why, what and how of buying shares. I do hope this has been helpful to get you started on your share investing journey. Reach out to me if there is anything else you need to know. Happy investing!

If you’re interested in improving your financial situation, but doing so feels overwhelming or your find you’re holding yourself back, book in for a free 30-minute mini-session today to find out how I can help.