9 investing basics for beginners

Let's lose the investing-speak and explain 9 investing basics you need to know as a beginner.

Here are 9 investing basics all beginners should know! There’s so much investing-speak out there and to be honest it puts a lot of first-time investors off the idea altogether. But we’re going to decode the language in a way that is simple and clear so you can get started on your investing journey and you have some knowledge in your back pocket. If you’re unsure as to whether now is the right time for you to start investing in shares, check out this helpful guide before you start. Otherwise, here’s 9 investing basics you should know!

#1 what's a share?

A share is a piece or “share” of a public company. You’ll also see shares referred to as stocks, equities or securities. A public company is a company that anyone can buy and is “listed” on an exchange. Most of these companies were run privately, before opening up so the public have the ability to invest in their profit and loss through share investing. Public companies also have some reporting they have to share with the public - something private companies don’t have to do. You can buy and sell these shares, and your investment provides the company with money to keep investing back into the business. Likewise you can benefit when the business does well! Keep reading and we’ll share some examples as to how you can practically do this investing.

#2 what’s a stock exchange?

A stock exchange is a central place where shares (of companies or funds) can be bought and sold. There’s a bunch of these around the world. e.g. Australian Securities Exchange (ASX), the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotations Stock Market (NASDAQ) in the US. You’ve probably seen these mentioned in the news and wondered what all those acronyms meant ha!

#3 what’s a share market?

The “share market” is the market as a whole. This could be made up of multiple exchanges in regions. I.e. The US share market is made up of multiple exchanges across the US. A company only lists on one exchange, so getting to know which companies you would like to invest in and the exchange they’re listed on is a key part of your research before you start placing trades.

#4 how can I buy shares?

You can invest in shares through an online broker - not direct to the exchange. A platform can also be used which is a one-stop-shop that can help you buy (like a broker) and manage your investments.

Need any examples?

Examples of brokers include Selfwealth, CommSec and Pearler.
Examples of platforms include Vanguard Personal Investor, Sharesies, Superhero.

You'll have to keep your own records for tax when using a broker, whereas a platform will do this for you. Keep this in mind when you start investing - how much paperwork do you really want to wrangle every tax time?

#5 what’s a share registry?

A share registry is typically a third party company that acts like the admin office for a public company - they’ll keep a record of shareholders, manage communication and update things for you like your address and dividend payment instructions.

#6 what is an index?

Indexes track the performance of a group of companies, e.g. the S&P/ASX200 tracks the top 200 public companies listed on the ASX (Australian Securities Exchange). Here’s some of the most well known indices you’ll see mentioned in the media and in conversation:

All Ordinaries - the oldest index in Australia. This tracks the share prices of 500 of the biggest companies listed on the ASX.
S&P/ASX200 - as mentioned above, this tracks the performance of the top 200 publicly listed companies on the ASX.
S&P 500 - this tracks the performance of the top 500 public companies in the US.

#7 what is active investing?

Active investing involves actively researching and investing in companies with a view to build a portfolio that will outperform an index. An index might also be called a “benchmark” as it's the result you would get without any effort. Let’s touch on the pros and cons of this investing approach quickly:

pros of active investing:

it gives you the ability to invest in specific companies you love/are interested in
you can manage tax implications more closely
you‘re able to invest in companies that aren’t within a specific index

cons of active investing:

more hands on research is required
more time, paperwork and fees are involved
often times active investing does not outperform passive (index) investing

#8 what is passive (index) investing?

You can buy an exchange traded fund (ETF) that just buys or tracks certain indexes. For example, the Blackrock "IOZ" ETF, tracks the A200 index! It's a low cost way to have exposure to many companies or an index. Let’s touch on the pros and cons of this investing approach quickly:

pros of passive (index) investing:

it’s set and forget
there’s less research and paperwork time required
the fees are lower

cons of passive (index) investing:

you may have limitations on investments, although new products are created all the time
it may be harder to screen companies you don't want exposure to
it's not sexy (but that's good when it comes to investing!)

#9 what ways can you invest in shares?

There’s a few options out there for you to consider when you’re starting on your investment journey. Some have been around for a while, others are newer and coming through the ranks. Get to know the full spectrum of some of your options and decide what’s right for you and your investing strategy:

single/individual shares:

this involves buying individual shares of specific companies you love/are interested in/you believe in.
this approach is not as diversified - investing in one business or sector alone = all your eggs in one basket. You may want to build a portfolio with a mix of business and industry types to help balance out your risk.

managed/mutual funds:

this involves investing with a pool of people into a mix of company shares/bonds/cash packaged together.
these can be passively or actively managed by a fund manager.
you don’t own the company shares directly, you own a unit of the fund - you are a unit holder.
These are more traditional - they have a daily unit price and are often not listed on an exchange. Your superannuation is basically a managed fund, to give an example.

exchange traded funds (ETFs):

ETF’s have units that can be bought and sold on a stock exchange, hence 'exchange traded'.
more times than not they are passive (index) funds - not actively managed.
you don’t own the company shares directly - you own units in the fund.

listed investment companies (LIC’s):

LIC’s are companies you can invest in via a stock exchange.
the company invests into other companies ✨wild✨.
it's basically an old school active investment.
sometimes you can buy shares in the LIC at "a discount" aka for less than than the total value of the companies it holds... if that makes sense.

micro-investing:

micro-investing is usually done on an app.
they’re a bit of a one-stop-shop - they try to simplify the concepts and they do all your paperwork for you come tax time.
you can buy smaller amounts of shares or units in funds that may otherwise need a higher amount to invest in.
they’re a great option to start learning to see how markets react at different times!