How to invest in shares

If you only read one section, make it this one. Learning how to invest in shares comes down to a handful of decisions, and none of them require a finance degree. The rest of this guide explains each step in plain English so you know why you are doing it. Most people who invest in shares successfully are not the cleverest in the room. They simply start, stay consistent and keep their costs low.

1. Sort out your foundations first. Have an emergency buffer and clear any high-interest debt before you put money into the market.
2. Decide what the money is for. Your goal and time frame determine how much risk makes sense.
3. Choose how you will invest. For most beginners that means a low-cost, diversified ETF rather than picking individual companies.
4. Open an account with a licensed broker. Compare brokerage, account type and what markets you can access.
5. Place your first order. Fund the account, search for the ticker, and buy with a limit order.
6. Keep investing regularly and leave it alone. Time in the market does more of the work than clever trades.

A share is a small slice of ownership in a company. When you buy one, you become a part-owner of a business, whether that is a bank, a miner, a supermarket chain or a software firm. The company is divided into millions or billions of these slices, and they trade on a stock exchange. In Australia, that exchange is the Australian Securities Exchange, or ASX, which lists close to 2,000 companies.

Shareholders can make money in two ways:

• Capital growth. If the business grows and other investors become willing to pay more for it, your shares are worth more than you paid. You only lock in that gain when you sell.
• Dividends. Many established companies share part of their profit with shareholders, usually twice a year in Australia. You receive cash, or you can reinvest it in more shares.

Prices move because the market is constantly re-estimating what a company is worth. Profit results, interest rates, commodity prices, new competitors and plain old mood all push the price around. In the short term the market behaves like a voting machine. Over long periods it behaves more like a weighing machine, rewarding companies that actually grow their earnings.

Put simply, when you invest in shares you are buying a stake in a real business and sharing in its results, good or bad. That is very different from putting money in a bank account, and it is why investing in shares needs a longer time frame.

You can follow daily moves, company results and what is driving the market in our ASX coverage, which is a good way to learn the language before you put money in.

Cash in a savings account is safe, but its buying power erodes when prices rise. Over very long periods, Australian and global shares have returned more than cash and bonds, which is why so many people invest in shares for the long term and why they are a core part of most long-term portfolios and of the super funds most of us already have.

That higher return is payment for taking on risk. Here is the honest picture:

The market has fallen hard before. The ASX 200 lost more than half its value between late 2007 and early 2009 during the global financial crisis, and it dropped by more than a third in about a month in 2020. Both falls were followed by recoveries, but they took patience and, more importantly, they hurt people who needed their money at the wrong moment.

The rule that keeps most beginners out of trouble: only invest money you will not need for at least five years, and ideally closer to ten.

The best share portfolio in the world will not help if a car repair forces you to sell at a loss. A few quick checks make it much safer to invest in shares.

• Build an emergency buffer. Three to six months of essential expenses in a savings account means you will not be forced to sell investments to pay a bill.
• Deal with expensive debt. Paying off a credit card charging 20% is a guaranteed return that no share can reliably match.
• Know your goal and time frame. Money for a house deposit in two years should not be in shares. Money for retirement in thirty years can handle far more ups and downs.
• Check how much risk you can stomach. If a 30% drop would make you panic and sell, you need a more conservative mix, not a better stock tip.
• Remember your super. Your employer is already paying into a fund that holds shares. Extra contributions are worth comparing with investing outside super, because of the tax differences. Our super news and explainers cover the latest changes.

If you want a rough idea of how fast regular contributions can grow, our finance calculators let you play with different amounts and time frames before you commit.

You do not have to pick companies yourself. There are three common ways to invest in shares and get exposure to the market, and they suit different people.

An exchange traded fund (ETF) trades on the ASX just like a share, but it holds many investments inside it. An ETF that tracks the ASX 200, for example, gives you a small piece of the 200 largest listed companies for the price of one trade. A global shares ETF does the same for overseas markets.

Fees matter more than they look. A 1% annual fee sounds small, but on a $50,000 balance it is $500 a year, every year, whether the fund does well or badly. Over decades, it can quietly eat tens of thousands of dollars of growth. That is a big reason many beginners start with broad, low-cost index ETFs.

There is no official minimum. In practice, the limit is brokerage. Most brokers charge either a flat fee per trade or a percentage of the trade value, and a flat fee takes a much bigger bite out of small purchases.

The lesson is to avoid lots of tiny trades. Saving up a decent amount and investing it in one go, or using a broker with very low or zero fees for small trades, keeps more of your money working. Fractional share platforms and automatic investment plans are another route if you only have a small amount to invest each pay.

To buy shares on the ASX you need a stockbroker or investment platform, which is the middleman that places your order on the exchange. The good news is that online brokers have made this cheap and quick. The tricky part is that they differ in ways that are easy to miss.

Check that the firm is licensed on ASIC's Financial Services Register, and look at the fine print on inactivity fees, data fees and what happens if you want to transfer your shares out later. A broker with a flashy app and a slightly higher fee is not automatically better than a plain one that does the job.

Choosing between CHESS-sponsored and custodial holdings is mostly about control and flexibility. With CHESS sponsorship you hold the shares directly and can move them between brokers more easily. With a custodian the broker holds them for you, which can mean lower fees and simpler admin but less direct ownership. Neither is wrong. Know which one you are getting.

Opening a trading account is a lot like opening a bank account, and it usually takes a day or two to be approved.

1. Choose the account type. Most people start with an individual account. Joint accounts, trusts and company structures suit specific situations and are worth a chat with an accountant.
2. Provide your details. You will need photo ID, your address and usually a linked Australian bank account.
3. Give your tax file number (TFN). It is optional, but without it the broker may have to withhold tax from some payments at the top rate.
4. Link your bank account. This is how you will move money in and out. Most platforms use a linked cash account.
5. Fund the account. A bank transfer is usually enough. Wait for the funds to clear before you place an order.
6. Switch on two-factor authentication. It is a small step that protects the account if your password leaks.

If you plan to buy US shares, you will normally also complete a W-8BEN form. It tells the US tax authorities you are an Australian resident, and it generally reduces the tax withheld from US dividends from 30% to 15%.

Once you are in, investing in shares online takes a couple of minutes. Search for the company or fund by name or by its ticker code, the short abbreviation used on the exchange, then choose how many units you want and what price you will accept.

There are two main order types worth understanding:

• Market order. Buys immediately at the best available price. It is quick, but on thinly traded shares the price you get can be worse than you expected.
• Limit order. You set the maximum price you are willing to pay. The order only goes through at that price or better, which gives you control and avoids nasty surprises.

Most beginners are better off with limit orders, particularly outside the busiest times of the day. The ASX trades on business days from about 10am to 4pm Sydney time, and orders placed outside those hours are queued for the next session.

After a trade is matched, it settles two business days later, which is called T+2. That is when the shares officially land in your name and the money leaves your account. Check the contract note or confirmation your broker sends and keep it. You will need it at tax time.

This is the question everyone wants answered and the one nobody can answer for you. What we can do is lay out the common approaches and how they differ. Whichever route you take to invest in shares, the same principles apply: spread your risk, keep costs down and stay patient.

Index investing

Buying a broad index ETF and adding to it regularly is the approach many experts suggest for anyone learning how to invest in shares. You accept the market's return, minus a small fee, instead of trying to beat it. Research has repeatedly found that most professional fund managers fail to beat their benchmark after fees over long periods, which makes it hard to justify the extra cost and effort for many everyday investors.

Dividend investing

Some people who invest in shares favour companies with a long history of paying dividends, particularly because of franking credits. It can be appealing if you want income, but a very high dividend yield is sometimes a warning sign that the market expects the payout to be cut. A great yield from a struggling business is not a bargain.

Growth investing

Growth investors look for companies that are expanding quickly and often reinvest their profit rather than pay it out. The potential upside is higher, but so is the risk, because the share price already assumes a lot of future success.

If you pick individual companies to invest in shares

Spend time on the basics before you buy. A simple checklist helps you stay disciplined:

• Do you understand how the business makes money? If you cannot explain it in two sentences, skip it.
• Is profit growing? Look at several years of earnings, not just the latest result.
• How much debt does it carry? Heavy borrowing makes a company fragile when conditions turn.
• What is the price-to-earnings (P/E) ratio? It compares the share price with profit per share. Compare it with similar companies, not with the whole market.
• Is the dividend covered by profit? A payout larger than earnings cannot last.
• What could go wrong? Read the risks section of the company's annual report.

Company announcements, results and takeover news all move prices, so it helps to follow the investing news section before and after you buy.

Australia has an unusual system called dividend imputation, and it is one of the biggest perks of investing in shares listed on the ASX. When a company pays tax on its profit and then pays you a dividend, the dividend can come with a franking credit that represents the tax already paid, usually at the 30% company rate (25% for some smaller companies).

When you do your tax return, the franking credit counts towards your own tax bill. If your marginal rate is higher than the company rate, you pay the difference. If it is lower, the leftover credit is refunded to you. This is why fully franked dividends are particularly attractive for people on lower tax rates, including many retirees.

Most companies give you a choice between taking the dividend as cash or joining a dividend reinvestment plan (DRP). A DRP buys more shares with your dividend, often without brokerage. It is a handy way to compound over time, though you still owe tax on the dividend in the year you receive it, even if you never saw the cash.

Tax is not a reason to avoid investing in shares, but ignoring it leads to unpleasant surprises. There are two main events to be aware of.

• Dividends are assessable income in the year you receive them, together with any franking credits attached.
• Capital gains arise when you sell for more than you paid. The gain is added to your taxable income for that year. If you owned the shares for at least 12 months, you usually get a 50% discount on the gain.

If you sell at a loss, you cannot offset it against your salary, but you can use it to reduce capital gains in the same year or carry it forward. Keep records of the date, price and number of shares for every purchase and sale, plus any brokerage, which is added to your cost base. If you have bought parcels at different times, you also need to track which ones you sold.

The details, including tax rates and how to report investment income, are covered in our tax basics guide, and the ATO's own capital gains tax page explains how to work out your gain. The ATO also receives data from share registries and brokers, so declare everything.

The most powerful tool a beginner has is time. When you invest in shares for decades, your investments earn a return and that return earns a return of its own, growth builds on itself. This is compounding, and the longer it runs, the more it does.

The table below shows what happens if you invest $500 a month and earn a steady annual return. Real markets never move in a straight line, so treat these as illustrations, not forecasts, and they ignore fees and tax.

Notice that over 30 years at 7%, you contribute $180,000 but end up with around $610,000. More than two-thirds of the final balance is growth, and most of that arrives in the final decade. Waiting five years to start usually costs far more than the contributions you skipped.

The practical version of this is dollar-cost averaging: investing a fixed amount on a regular schedule, whatever the market is doing. You buy more units when prices are low and fewer when they are high, and you never have to guess the right moment. Automating the transfer takes willpower out of the equation.

• Chasing hot tips. By the time a stock is all over social media, much of the move has often happened.
• Putting everything in one company. Even great businesses can have terrible years. Diversify.
• Trying to time the market. Missing just a few of the best days over a decade can slash your long-term return.
• Panic selling in a downturn. It turns a temporary paper loss into a permanent one.
• Ignoring fees. Brokerage, fund fees and currency charges add up.
• Investing money you need soon. Shares are for goals that are at least several years away.
• Borrowing to invest too early. Gearing magnifies losses as well as gains, and it is best left until you have real experience.
• Forgetting the tax records. A messy paper trail turns tax time into a headache.

Most mistakes made when investing in shares come down to emotion, not knowledge. A written plan that says what you will buy, how often, and under what conditions you would sell makes it much easier to stick with it when markets get noisy.

Beginners spend a lot of energy on when to buy and very little on when to sell. Anyone who chooses to invest in shares needs an exit plan as well as an entry plan. Having rules in advance helps you avoid reacting to headlines. Good reasons to sell include:

• You need the money for the goal you were saving for.
• Your reason for owning the company has changed, for example its business has deteriorated for good.
• One holding has grown so large that it dominates your portfolio and you want to rebalance.
• You have found a better use for the money, after considering tax and brokerage.

A falling share price on its own is not a reason to sell. Ask whether the business is worse or whether the market is simply nervous. Check the tax effect first too, since selling at 11 months instead of 12 can sharply raise the tax on a gain.

Scammers target people who want to invest in shares. They use fake celebrity endorsements, professional-looking websites and fabricated testimonials to lure people into platforms that do not exist. The Australian government's Moneysmart service has a useful run-down of the warning signs on its investment scams page.

• Be wary of anyone promising guaranteed returns or high profit with no risk. Real investments always carry risk.
• Never invest because of an unsolicited call, text, email or direct message.
• Only deal with firms that hold an Australian financial services licence, and check the register yourself rather than trusting a link they send you.
• Be sceptical of pressure to act fast and of requests to pay in crypto or by transfer to a personal account.
• Treat "insider tips" and exclusive group chats as red flags.

If something sounds too good to be true, it nearly always is. Take a day, talk to someone you trust, and verify the company independently.

Here is how to invest in shares in practice, with all the pieces put together. It is an illustration of a sensible sequence, not a recommendation for your circumstances.

1. Build a buffer of a few months of expenses in a savings account.
2. Decide on a monthly amount you can invest without touching it, even if it is small.
3. Open an account with a licensed broker that suits the size of your trades.
4. Pick a broad, low-cost ETF, or a small number of them, and place your first limit order.
5. Set up a regular contribution so the habit does not depend on motivation.
6. Review once or twice a year, rebalance if needed, and keep your records tidy.

Once that foundation is in place, you can decide whether you want to add individual companies. Many people keep most of their money in diversified funds and use a small slice for shares they have researched themselves.

To keep learning, follow market news to see how prices react to results and economic data. The Moneysmart how to invest hub is a good independent starting point if you want a second source.