How to buy stocks

Online broking websites help you buy shares in a few minutes. Source: Pixabay

On a recent episode of The Pineapple Project, a podcast about personal finance, host Claire Hooper posed a question all first-time investors sheepishly ask at some point: where can I buy a share?

It's not an embarrassing question – in fact, it's a completely reasonable one.

We've all heard of shares – perhaps on the news: "Telstra shares drop after ratings downgrade", or from a parent: "I bought shares in Tesla today – Elon Musk is a god among men" – but it’s seldom explained what they are, how they work or how you get them.

It's not like you can go down to Woolworths or Coles and grab one off the shelf, or have Uber Eats deliver one to your door.

It's a little bit more complicated than that – but not a lot more. Once you understand a few basic steps you can buy your own share from the comfort of your couch and take your first step to becoming an investing guru.

What is a share?

 As the above video explains, a share – also known as a stock or equity – is an ownership interest in a company. Sounds complex but bear with me.

Let's say you start a business with your best friend selling novelty posters. After much debate you decide to call it “The Big Poster”, a nod to the Coen brothers. You both put in $10,000 dollars to fund the start-up costs, which means you each own 50 per cent of the business. At this point, the company is considered "private".

After two years the business is going magnificently. But to expand into new markets you need money, so you decide to "go public". This means selling a chunk of the business to the investing public by listing it on a public exchange – such as the Australian Securities Exchange (ASX) – under the ticker (abbreviation) TBP. This, in a nutshell, is how stocks are created.

Where can I buy a share?

Let's switch roles. Assume you've heard of this awesome company, The Big Poster, that has been doing well and is now being offered on the ASX. You read the latest research, assess the company's merits, and decide it's a worthwhile, long-term investment. So, what next?

Thanks to online trading platforms, buying and selling shares is easier than it has ever been. Before the internet, buying and selling shares was a more involved process. Investors had to find a professional investment broker – a person who arranges transactions between buys and sellers – call them up, register for an account, transfer money into that account, usually by cheque, receive some advice about what to buy, and tell them which shares they wanted to buy. It was time-consuming and expensive.

While these days you can't walk into the ASX in Sydney and buy a share over the counter, online broking websites do allow you to buy shares in a few minutes, some from your smartphone. The major banks have websites – such as CommSec from CBA, nabtrade from NAB – that allow you to use the funds in your bank account to buy shares. Several non-bank brokers such as CMC Markets and Stake vie with the big banks with offers of better service at cheaper rates.

When choosing a broking platform, compare the features that each offers – ease of use, which stock exchanges you can access – and the fees they charge.

CommSec Screenshot

CommSec is the Commonwealth's online sharetrading platform

Let’s return to our hypothetical company, TBP. When you buy a share in TBP, you will become a part-owner of the business. Over the long term, say several years, the value of your ownership stake will rise and fall according to the success of the business. The better the business does, the more your ownership stake will be worth. You're also entitled to certain benefits that come from owning a business. For instance, a portion of the profits – which are distributed through regular dividend payments – and the right to vote at company meetings.

Is investing in shares risky?

Stocks are one of many ways to invest. But why choose stocks instead of other options, such as bonds, rare coins, or antique sports cars? Savvy investors invest in stocks because they tend to provide the highest potential returns.

However, on the downside, stocks tend to be the most volatile investments, and there is no guarantee of a positive return. Companies may fall short of their targets or face new competition in which case their value drops, which is reflected in a lower share price. But you can minimise this by investing in reputable companies that you like and by taking a long-term approach to investing.

Before you invest it’s crucial to do thorough research. Morningstar offers research and tools to help investors like you find suitable ways to invest your money. You can start by finding the latest equity research and information in the stocks section on Morningstar Premium members have exclusive access to in-depth Morningstar shares reports and the Prem Icon best stock ideas list.

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Emma Rapaport is a reporter for Morningstar Australia

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