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Why do people invest in the Sharemarket and how does it work?

Introduction

In broad terms, a share market, like any market is a place where buyers and sellers are brought together to buy, sell, trade and invest in financial instruments, while also being a place where companies can facilitate the issuance of shares, initial public offerings and raising capital.  

Such financial activities are conducted through institutionalised formal exchanges or over-the-counter (OTC) marketplaces that operate under a defined set of regulations. There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities. [1] 

 

In Australia, the exchange is called the Australian Stock Exchange or ASX, there is only one primary market in Australia, however, in markets like the USA, there can be (and are) a number of exchanges set up such as the New York Stock Exchange (NYSE), Nasdaq, BATS and the Chicago Board Operations Exchange (CBOE).

The CBOE was responsible in part for the Cryptocurrency crash when it offered derivative options to bet against the market back in early 2018.

[1] https://www.investopedia.com/terms/s/stockmarket.asp

 

 

1. Why do people invest in the sharemarket?

There are several reasons people invest in the share market, however, the primary reason is to generate wealth.

This can be achieved in a number of ways on the sharemarket, through either the potential capital growth of the share price purchased, through dividends paid by the company to each share as a percentage of the profit generated and sometimes a combination of both[1].

In Australia, shares can be bought and sold on the Australian Stock Exchange (ASX) through online trading platforms – such as CommSec, IG Markets or ANZ Share Investing – once a CHESS number has been set up with the ASX. 

The CHESS number or Clearing Houses Electronic Sub-Register System is part of an integrated system that settles trades made and exchange the title or legal ownership of those financial products for money. The CHESS transfers the title or legal ownership of the shares while simultaneously facilitating the transfer of money for those shares between participants via their respective banks.[2]

By investing in shares on ASX you are buying part ownership of an ASX-listed company – usually, minimum investments can start from as little as $500 – you can enjoy and be a part of their performance for your personal gain (or loss).

 

So, what is the Stockmarket

If the company performs well, as a ‘shareholder’, you can enjoy capital growth of your ‘asset’ in the form of a share price increase, as well as dividends paid out of the profits generated – that are not being re-invested in the company for future growth opportunities.

Meanwhile, if the share price movement is backwards, unfortunately so does your investment. As a ‘part-owner’ of the company, you have to work with the good, bad and sometimes ugly of being a company owner.

[1] https://www.asx.com.au/products/shares.htm

[2] https://www.asx.com.au/documents/research/chess_brochure.pdf

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the introduction of technology, trading shares, which was once facilitated by brokers running all over the place at the ‘trading floor’ of the stock exchange, most transactions is facilitated electronically.
2. How does the sharemarket work?

Thanks to the introduction of technology, trading shares, which was once facilitated by brokers running all over the place at the ‘trading floor’ of the stock exchange, most transactions are facilitated electronically.

 Participants in the stock market range from individuals, known as retail investors, to big institutional investors, such as fund managers, insurance companies, banks and pension funds.[1]

Odds are that if you don’t have any shares but are currently employed in Australia – even if you are employed part-time as a student – you will have a superannuation account. That account is effectively a managed fund, and the way a managed fund works is that all your money is pooled with other peoples and the fund manager buys & sells shares, bonds, currencies, property, invests in other funds all to increase the value of the fund, and your super. Apart from property, most of those transactions are facilitated on share markets – such as the ASX.

Similar to most markets, when an investor (or buyer) finds a share that they would like to purchase, they select a three letter code – such as VRL for Village Roadshow Limited or ANZ for ANZ Bank – enter the number of shares they want and the price they wish to pay, then place the order.

 

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The trading platforms allow for buyers to either select the price as ‘market price’ in which case the share is simply purchased at the ‘going rate’.

Alternatively, the share trading platforms allow you to stipulate a price you are willing to pay per share and waits until that price comes available before activating the trade.

Once the order is placed, and buyers and sellers are matched, the shares are purchased utilising the CHESS system, and money changes hands, while shares are transferred from the sellers account to the buyers’ account.

It is important to note, that the amount of shares you want doesn’t need to perfectly match up with an amount another person (buyer) is looking to buy. If you want more or less, the trading systems allow for packages of shares to be split up and disseminated as required between one or multiple buyers in the market.

[1] https://www.commsec.com.au/support/learn/investing-basics/how-does-the-stock-market-work.html

3. What factors can affect share prices?

The prices of individual shares on the sharemarket are subjected to a wide range of factors that can affect the prices.

The market and its performance are tracked using a number of measures, known as indexes.

These indexes such as the All Ordinaries – which tracks the top 500 companies listed on the ASX – provide a gauge on how the overall performance of markets, or particular segments – such as emerging company index (XEC)[1].

The prices on the share market can rise and fall for a wide range of reasons, outlined below: 

  • Company-specific – such as profit announcements, corporate restructures or new opportunities
  • Market-specific – such as the announcement of the government cracking down on sugar in soft drink and its effect on Coca-Cola Amatil’s (CCA) core market of carbonated soft drinks
  • Industry-specific – the Royal Commission into the Banking, insurance and finance industries
  • Macro-economic - such as the Chinese-US trade war

 

All of these specific reasons or changes can positively or negatively take its toll on the share price on the share market.

Other factors include demand & supply (how much is available to buy and how many people what to buy a particular share), interest rates (availability to money), election cycles, geopolitical risks, even activism investing, which often led by large hedge funds in taking a position against a company they see as behaving badly to crush their share price.[2]

[1] https://www.asx.com.au/asx/statistics/indexInfo.do

[2] https://wall-street.com/trading-basics-factors-influence-share-prices/

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4. How to start out in the sharemarket?

Financial markets can be an extremely unforgiving place, you cannot ‘undo’ a buy or sell, likewise just because you don’t understand or know about something, doesn’t mean you don’t have to pay out your position – with this in mind, education & knowledge is vital.

People may or may not understand all instruments at their disposal and may invest in positions that are leveraged – such as CFD’s, which only require a small percentage of the actual position or outlay to make the trade – which could cost you a lot of money.

There are a number of excellent sharemarket books, such as ‘Starting out in shares – The ASX Way’ that can provide a basic understanding. While most share trading platforms have their own training platforms – such as IG Markets Training Academy – which have a wide range of information, interactive exercises, quizzes and videos to help you learn how to trade using their platforms and what everything means.

 

sharemarket

Meanwhile, the ASX sharemarket game, provides an informative and interactive game for the general public and schools to proactively learn the basics, and start trading shares through a portfolio of ‘fake money’ but trading on real shares, in a like-real market.

This sharemarket game provides individuals with not only the opportunity to win some great prizes but also formulate investment strategies to encourage education including learning how to watch market movements, execute trades and how to become financially literate on the sharemarket – all before a registered user even steps foot in the investment ring.

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3. What are the functions of the sharemarket?

Sharemarket

 

Sharemarkets enable businesses, governments and organisations to raise capital, which can allow companies to expand their operations, invest in new infrastructure and ideally grow. In return for this capital, investors receive a ‘piece of the company’ by way of shares – which can be lucrative should the company be successful.

In addition, if a company decides it wants to raise money and have its shares traded on a stock exchange, it will sell shares to investors in what is known as an initial public offering (IPO)[1]. An IPO allows the company to become listed, raise capital or ‘payout’ the original owners or shareholders for their hard work in getting the company to its current stage, and continue its journey from there.

 

 

 

The sharemarket has risks and is exposed to volatility and individuals, companies, institutions and governments can all realise large capital losses should the market turn against them or they make an informed investment. 

The best advice is to seek advice, undertake education and speak to professional advisors before entering your journey on the sharemarket.

[1] https://www.commsec.com.au/support/learn/investing-basics/how-does-the-stock-market-work.html 

Looking to get started in Investing:

1. Schedule an appointment (Conference Call) with an Investment Manager

2. Submit a Managed Discretionary Account (MDA) application with Walker Capital Australia.

3. Open a trading account with the Walker Capital Australia’s executing broker.

4. Select from our range of investment strategies and choose your asset allocation between the choices of accounts.

5. Once all accounts are opened, and funds have been chosen, our team gets to work and begins trading.

 

We welcome you to give our team a call to discuss your investment goals and objectives.

You can call Walker Capital Australia on +61 2 8076 2210, and we’ll see how we can help you achieve your investment goals.