How to Buy Shares in Australia

The process of buying and selling shares in Australia is actually rather simple. These days the hardest part is setting up the trading account with your broker. In the past, you could setup an account over the phone and start trading immediately. Now, application forms can be 20+ pages and the terminology confusing for many.

Buying Shares for the Long Term - Cartoon

Before I go through the steps on how to purchase ASX shares, it is important that every new share investor asks themselves this question.

Why do you want to buy shares?

If it's to make "a quick buck" then you're looking in the wrong direction. People forget that buying stock in a company means you are actually buying a PART of that company. It's just the same as owning part of the local grocery store. By looking at every investment in this way, it forces you to step back and re-evaluate whether you are buying for the right reasons.

This post presumes you have an active account with a broker and simply want a step-by-step guide on how to buy your first share in Australia.

1 - Decide What Type of Shares You Want to Buy

Individual Shares - If you would like to purchase specific shares listed on the Australian Securities Exchange (ASX) you will require a stockbroker. You will have complete control over each individual investment.

Managed Funds - These can be bought directly from the company and do not require the use of a stockbroker. Financial Planners often push this avenue as they aren't experts on specific stocks, but instead follow the "time in market" over "market timing" philosophy. 

A Whole Portfolio - If you would like to buy a portfolio of shares and are looking for a well-balanced and market average approach, either a financial planner or stock broker can be of benefit. They can recommend a portfolio suited to your risk tolerance and invest accordingly.

And how will you buy them?

Initial Public Offering (IPO) - Involves buying shares when a company lists on the sharemarket. It is at a set price as specified in the Company Prospectus.

Off Market - You can buy shares "off-market" through a transfer. This is simply the transfer of ownership of shares, normally done between family members or different trading accounts for the same person.

Capital Raisings - If a company wishes to raise additional funds, they can do so via a capital raising. This is where they offer shares in the company at (usually) a discounted price to the current market price.

On Market - This is the fancy way of saying "buying them in the market". The rest of this article refers to this type of purchase.

 

2 - Choose a Stockbroker

Gone are the days of calling your broker and your order being shouted out over a chaotic trading floor. These days it is a quiet endeavour. Everything is done electronically, so either you manually enter your trades online, or your stockbroker does it on the other end of the phone. 

You have 2 choices: Full-service or online stockbroker.

Online / Discount Stockbroker - You will not receive any advice regarding your share purchases, they simply take your order by phone or you enter the trade manually on your computer. That's the reason they are so cheap. If you make a mistake or if you hit the wrong button, you are liable for any loss that may occur due to your mistake.

The benefit is that if you know exactly what you're doing, you will save money. For a share purchase of $10,000, you could save $70 or more in brokerage. An online broker in Australia will charge between $15 and $65, depending on whether you place the trade online yourself or over the phone.

Examples include E*Trade, Commsec and Bell Direct.

E*Trade, Commsec and Bell Direct Logos

Full-Service Stockbroker - Gives you specific advice on what to shares to buy and the price to pay. The transaction costs are higher as they provide a service, typically in the range of 1.0% - 1.5% with a $75 - $85 minimum.

What does this mean?

If you buy $5,000 worth of shares you will pay the minimum brokerage of $75 (as 1.0% of $5,000 is $50 - which is less than the minimum set brokerage of $75).

If you buy $7,500 or more of shares it will be based on a flat percentage of the amount you purchased (as 1.0% of $7,500 is $75 - the minimum set brokerage). For a $12,000 transaction, the brokerage would be $120.

Another benefit of using a full-service broker is that your brokerage fee is negotiable. Higher value orders and clients who trade regularly typically receive a lower brokerage percentage fee.

What are the benefits of each?

Online - Cheap and great for the experienced trader or those who know exactly what they're doing.

Full-Service Stockbroker - Receive specific advice. Great for those wanting to be told which shares they should be buying or selling.

 

3 - Select the Company (Share) You Want to Purchase

There are countless investment strategies you can follow to select which shares to buy, though they will usually fall into three categories.

Technical Analysis - Using charts to to make stock selection decisions. This strategy is normally used with a shorter investment time-frame.

Fundamental Analysis - Scrutinising the "books" of a company (PE Ratio, Dividend-Yield etc.) to establish the "intrinsic value" of a share and investing accordingly.

Stock Tips - Whether from friends, brokers or investment newsletters, this still remains one of the most commonly used strategies. Visit the stock tips page for more information.

 

4 - Placing the Order

I will divide this in to two parts: Online Brokers and Full-Service Brokers.

Online Broker

Although the exact steps are different for each broker, the general steps required are listed below and correlate to the number in the image.

  1. Log into Your Account - Your name and account number will be clearly visible. Double check you are in the correct account, as a single person can have access to multiple different accounts (e.g. their individual, joint, company, trust etc.)
  2. Check Available Balance - Your total purchase including brokerage must be less than this amount.
  3. Enter the Trade Details - Select whether you are buying or selling, the number of shares you want to buy and the company code of the stock (e.g. for BHP Billiton Limited it would be "BHP").
  4. Select "At Market" or "At Limit" - To buy "at market" means you will buy at the level the lowest seller is currently listed. To buy "at limit" means you enter the maximum price you are will to pay and your trade will be place up to that limit. If you pass through enough sellers before hitting that level, then your trade will be complete. If you do not, then the remainder of your trade will remain at you specified limit price. The term "Good for Day" refers to your order being valid for the rest of that day only. "Good until Cancelled" means your trade will stay in the market until it either a) transacts, or b) you cancel the order.
  5. Brokerage - This is where your adviser enters the brokerage on the trade. For the retail investor, this is where the brokerage is calculated and displayed.
  6. Order Placed By - State your name here if multiple people have authority to place a trade on the account.
  7. Preview Order - See a summary of the order prior to it being entered into the market.

How to Buy Shares Using ETrade

The secret is determining how many sellers there are and what price they are sitting at. If there are very few sellers at your specified price, it may be prudent to pay a little more to ensure you receive your full orders worth. If there is an abundance of sellers, it may be worth holding out until the end of the day before making your purchase. (This will also allow you to see the Dow Jones Futures and get an indication as to how the US share market will open that night. This is highly correlated to the Australian Stock Market.)

Full-Service Broker

A full-service broker is exactly that. They will (or should) do everything for you. If you have a good relationship with your broker, they will know your risk tolerance and what type of shares you are interested in. They will also give you specific price recommendations as they have the market depth in front of them (the list of buyers and sellers currently in the market) and can therefore recommend the optimum price to buy or sell your shares at.

If you ever come across a full-service broker who is not meeting your needs, or you simply do not feel comfortable with them, then you should change broker until you find one that feels right for you.

 

5 - Settlement

To "settle" your shares is industry jargon for saying, "to pay for".

The current rule for ASX settlement is T+3. That means, three business days after you make a purchase (or sale) the trade is settled. On this day you will be required to pay for (if buying) or will receive the money (if selling) proceeds from your transaction.

If you are using an online broker, you will be required to have money in your online broker's bank account when you place a trade. This "covers their butt" and ensures you will have the funds to pay for your purchase come settlement day.

If you are using a full-service stock broker, there are two possibilities.

  1. If you are new client, you might need to provide a cheque or similar before he/she will place the trade for you. This is because if you fail to pay for the share purchase by T+3, the broker is legally required to front the funds.
  2. If you are well known to the broker, they will place the trade the moment you call them, in anticipation of receiving the funds within three business days.

Gone are the days of being issued share certificates. When you buy a share you are able to sell it instantly. Instead of certificates, you are allocated a number which corresponds to your specific share holding. There are two numbers you can choose to be allocated.

Securityholder Reference Number (SRN) - Is a 10 digit number preceeded by the letter "i". This means your share is "held" by the share registry and this number is specific to your exact share holding in that specific company. If you only use SRN's, you will have a different SRN for every different company you hold shares in.

Holder Identification Number (HIN) - Is a number that is preceeded with the letter "X". This means your shares are held with your stockbroker. You still own them, so even if the stockbroker goes bankrupt, you have complete ownership and access to your holding. Using a HIN is easier than using SRN's, especially if you only use one stockbroker, as you can hold as many shares as you like on one HIN, making managing your portfolio much easier.

For more information - visit http://www.asx.com.au/products/chess_faq.htm

 

6 - Monitoring Your Portfolio

Once you have established a share portfolio, it's important to monitor it regularly. If you are a long-term investor, it's wise to only monitor it every week or so. If you check more often that weekly, you will be distracted by market "noise" which is the daily fluctuations of the market. If you are a short or medium-term trader, then daily monitoring may be required. Intra-day monitoring should only be done by those with very short investment timeframes (i.e. less than 30 days).

Both online and full-service stockbrokers will give you access to their website to monitor exactly what your portfolio is doing.

If you would like a portfolio manager (ASX Trade Ledger to make monitoring your portfolio and transactions a breeze) then signup to our trial membership. You can cancel at anytime during the first 30 days and still keep the Excel spreadsheet.

Portfolio Manager

 

7 - Selling your shares

The process of selling your shares is identical to buying them.
 
First, establish whether you hold your shares on SRN or HIN. If they are on SRN you must notify your broker of the number so the can "locate" your shares prior to selling them. If they are on HIN the broker will already have an accurate record of what you own so the sale can be done immediately.
 
Secondly, identify the exact selling price you wish to sell at. If there are adequate buyers at that level, the trade will go ahead. If the price is not lower than the other sellers wanting to sell their shares, then you must wait in queue at that desired price. For example: Lets say the buyers for XYZ are currently at $2.12. You can either sell at that price (provided there is enough volume at that level) or place it at a higher price (e.g. $2.15 and hope the market move up to fill your order).
 
If you are using a full-service broker you should ask for a recommendation as to where to place the order and they will do so accordingly. If they feel the stock will move up throughout the day, they may recommend you to wait until the end of the day before selling the stock. If they feel the stock will fall, they will sell immediately on your behalf.
 

The Solution?

If all this sounds too hard, try our broking service. Matthew Roberts has a keen eye for detail, and can walk you through the process of how to buy (or sell) shares on the ASX in a step-by-step manner. 
 
 

Absolute Investor provides general share market advice only.

Absolute Investor Pty Ltd (ABN 92 153 809 075) is a corporate authorised representative of Cygnet Securities Australia Pty Ltd (AFSL 241095). As the website does not take in to account your individual financial circumstances, you should consider talking to a financial adviser before making an investment decision. For more information about our services, please read our Financial Services Guide. Past portfolio returns are not a reliable indicator of future returns. Investing in shares involves risk, including loss of principal. While this website has been prepared and is updated with due care and attention, economic circumstances change with time and therefore no liability is accepted by Absolute Investor Pty Ltd, its related entities, agents and employees for any loss arising from reliance on the information contained in this website.

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