How can I get started investing?

This week, we turn to another reader’s question, on the topic of investing. Specifically, getting started investing as a student. (Although this information is relevant to anyone investing, especially in the Australian market, for the first time).

Following the Global Financial Crisis, a recent report reveals, many people in Australia turned their backs on the share market. While some became nervous about property investing too, bricks and mortar, ‘that you can see, touch or walk past’ remain popular. And people’s comfort levels with property versus shares can also be seen in the amount of gearing (or borrowing compared to value) associated with each class. Most property investors gear to the maximum. But most individuals who own in shares don’t borrow to invest at all.

According to a report from the ASX, 60% of adults in Australia have some form of investment outside of their institutional superannuation. Yet only 31% hold shares, compared to 37% who have invested in property.

Despite the Australian love affair with property, it is not a readily accessible mode of investment for everyone. And in recent years, many young people have turned to shares as a way to get their foot on the property ladder. After all, the minimum amount required to invest on the ASX is $500. That’s a lot less than deposit on a property will cost you.

Young people and shares

Over the last 5 years, the ASX reports, the number of young people aged 18 to 24 investing in shares has doubled, from 10 to 20%. The proportion of 25 to 34 year olds has also massively increased, from 24% to 39%. That is, higher than average.

Interestingly, young investors tend to be more risk-averse than their older counterparts. At first, this appears counter-intuitive. Older investors in particular are frequently warned not to take on too much risk as they approach retirement, lest they lose it all and not have enough working years to make it up.

However, investors’ attitudes towards risk may change over time as they understand the market better.

81% of investors under 35 said they were looking for ‘stable’ or even more worryingly, ‘guaranteed’ returns. By contrast, 41% of those over 55 were accepting of some volatility in their returns. Of course, returns are never guaranteed. While it is a good thing to be cautious, it is also important to be realistic. As the report reveals, 21% of the most risk-averse investors expected returns higher than 10%. That’s fairly unrealistic in today’s market, where double-digit returns largely appear to be a thing of the past.

Risk and return

Generally speaking, risk and return are usually inversely related. The higher the return, the more risky the investment. The lower the risk, the lower the return. (Generally, that is.)

Think of a bank loan. If you have very few assets and income to your name, a bad credit record and want to take out an unsecured loan for a holiday, it’s very likely that you would have to go to a dodgy lender and take out a high-interest rate loan. On the other hand, if you have a solid income and some assets, a good credit record, and want to take out a loan for a house that the bank has approved of, they’re likely to offer you a much more favourable rate as you represent a much lower risk to them.

Investors think much the same way. If the company seems risky, it had better come with a high return, to make up for the gamble we’re taking. If it seems solid, we’re usually willing to accept a lower return, given its comparative reliability. Many investors will have a mix of both higher and lower return investments, with higher and lower risks. But it’s not very realistic to expect to build a portfolio of all blue-chip stocks with very low risk that also pay you massive dividends and grow enormously each year.

The language of the sharemarket

The sharemarket or stockmarket has a lot of terminology for most new investors to learn. Far beyond words like ‘risk’ and ‘return’ and ‘dividends’. I think this is one reason many people feel more comfortable with property investing. Even if you don’t own a house, you probably live in one. So you understand how to talk about them in at least a basic way, and know what to look for when buying one. (If you don’t, make sure to check out my house inspection cheat sheet!)

But when it comes to shares, very few of us grow up speaking the lingo. It can be tricky to understand how the market works in any tangible sense. And I think that’s one of the reasons so many people love ‘bricks and mortar’, even though they don’t always have the best return.

You can buy glossaries filled with stock market terminology. But often, they are too static, and in the case of one glossary I read, it wasn’t even written by an investor. The sheer amount of jargon also means that a very thick dictionary indeed would be necessary.

Get started here!

Personally, I have found investopedia.com to be pretty useful. It even has little videos to illustrate some of the more important concepts. Although it is an American site, it does define Australian stock exchange terms. The ASX site also has an Education section which can be very useful, and a free ebook Getting Started in Shares. If you’re looking for information on another country’s stock market, I highly recommend going straight to that stock market’s website and checking their resources first, before looking at any commercial products (read this to find out why!).

Check out these resources, and next time, we’ll take a look at how you can grow your sharemarket knowledge, expand your investing vocabulary, and get a great return on your time!

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