Learn how to Start Investing in Australia
Have you ever wondered how to start investing in Australia? People often think about investing but are hesitant to start. There are many reasons people start learning to invest. Some are trying to build a better financial future. Other’s are looking for a place to store their money- have you seen the pitiful returns offered in savings accounts or terms deposits! Whatever your reason is, investing can be both empowering and rewarding. But you need to have a plan before your money gets to work.
How much can you afford:
First, you will need to work out how much you can afford to invest. Some questions you need to ask yourself are:
- What is my current financial position?
- What is my cost of living?
- What are my monthly fixed expenses/debts?
- What is my discretionary spending?
- How much can I afford to invest?
- How much can I regularly invest?
If you are having trouble working out your expenses, we wrote an article on how to set up an emergency fund that you may find useful.
What will you invest in:
Here in Australia, there are typically two popular investment classes. Residential/Commercial Property and Shares listed on the Australian Stock Exchange. Both property and shares have their own pros and cons that investors need to be aware of.
To invest in property you generally need a large deposit to get started. You generally need between 5-20% of the purchase price as a deposit and there are also legal fees and stamp duty to consider. These extra fees can account for roughly another 5% of the purchase price. Property also requires active management with rent collection and maintenance. Property still remains a popular investment vehicle for many Australians as some parts of Australia have seen massive capital growth and return on investment.
Investing in shares is easier to get started and you can begin with a smaller deposit. You can generally invest in shares with as little as $100. The share market is generally viewed as ‘riskier’ as the price fluctuates and world events can significantly affect your investment. Lending for shares can be harder to obtain and presents further risks.
To help you understand Property and shares, we will have a look at both.
Investing in Australian Shares:
In Australia, you can purchase shares in businesses that are listed on the Australia Stock Exchange (ASX) or other stock exchanges. You can purchases shares yourself or you may choose to put your money into a Managed Fund. A Managed Fund is where your money is pooled with other investors and managed by a finance professional. We are going to discuss how to directly invest in shares by yourself. However, there are a few things you need to do before you purchase your first share.
To purchase shares you will need a share broker. These days most people use an online share broking platform. If you’re with one of the major banks in Australia Like the CBA or ANZ, they offer their own online share broker platform. If your bank does not offer this service, you can look for an independent platform such as Self Wealth, or sign up to another bank’s platform.
It should be noted that brokers charge a fee each time you buy or sell shares. Fee’s range from $9.50 -$19.99 for a trade of $1000. With some brokers the price increases if the value of the trade is higher.
Once you’ve decided who your broker will be, you will need to confirm your identity before they will open your account. Make sure you have some identification documents hand such as your driver’s licence, passport and birth certificate. It can take up to two weeks before your account is open so you will need to be patient. When your account is up and running you will be issued a Holder Identification Number (HIN). A HIN is a number issued by the ASX and used to identify your holding. You can find your HIN on your first statement or by contacting your broker.
Once your account is up and running, you will notice that you have access to something called a ‘cash account’. A cash account is exactly what it sounds like. It’s an account where you transfer the funds you want to invest, and once the funds arrive in this account you can purchase shares.
Before you make your first purchase, you need to have a plan. You should consider seeking professional financial advice. There are many strategies people use to invest in Australian Shares. We will outline a few strategies and terms that you should be aware of:
- Buy and Hold – Purchasing shares to hold for the long term (5+ years). Check out this article on long term share investing.
- Individual Shares – Buying Shares in Individual companies.
- Index Investing – Purchasing a portion of the market, usually in an Exchange Traded Fund (ETF).
- Trading – Frequently purchasing shares and attempting to make money off short term price fluctuations.
- Dollar-Cost Averaging (DCA) – Purchasing smaller parcels of shares at frequent intervals instead of investing a lump sum of money.
- Listed Investment Company (LIC) – A company that buys shares and is listed on the stock exchange.
- Exchange Traded Fund (ETF) – A collection of stocks that usually tracks an index such as the ASX200 – 200 largest companies in Australia.
Once you work out your investment strategy, it is almost time to purchase your shares. First, you will need to work out how many shares you can purchase and for what price you can purchase them for. You will need to have enough funds in your cash account to be able to cover the purchase and brokerage fees. When you place your order, you have a few options:
- At Market – Purchase the shares for their current market value.
- At Limit Price – Your order will only be placed when the shares are at your limit price or cheaper.
- Conditional Order – Includes one or more conditions such as price above or below, the volume of trading etc. This is usually used by advanced investors.
Once your order has been placed and any criteria met, your order will be filled once shares are available (For larger companies this does not take long). It can sometimes take a couple of days for the purchase to settle but in time you will be sent a statement confirming the details of your purchase and the shares you now own.
Australian’s have a fascination with property. It is often said that owning a property is the great Australian dream. Property is also a very popular investment class for people looking to start investing in Australia. There are two major types of property investment to choose from. Residential houses where people live and commercial properties where businesses operate. Residential and commercial property both have their pros and cons.
- Easier to find tenants with shorter vacancy periods.
- Lower deposit required (as low as 5%).
- Easier to add value through renovations, subdivisions etc.
- Lower yields.
- Owner pays for maintenance and outgoings.
- Shorter lease periods.
- Longer lease periods that are typically 3-5 years with options for renewal.
- Tenant pays most of the outgoings such as general maintenance and rates.
- Generally, higher yields compared to residential property.
- Set rent increases per year that can be incorporated into the lease.
- Longer vacancy periods.
- Higher deposit required (Typically at least 30%).
- Capital value tied to lease.
- More restrictions from banks such as regular valuations.
- Can be harder to resell.
Most investors borrow money to invest in property. So, before you start looking at properties, you need to figure out how much you can afford to borrow. You can figure out your borrowing power by speaking to your bank, who will be able to show you their products. Many investors choose to go an see a mortgage broker who can show you the products of multiple banks and lending institutions.
When you have figured out your borrowing power, it is time to start looking for a property. Investors need to do a lot of research before deciding to buy a property. To help find a suitable investment property, many investors choose to seek help from a Qualified Property Investment Advisor (QPIA). Investors may also choose to use the service of a Buyers Agent, who will act on your behalf and complete the buying process.
Several other professional services should be considered throughout the buying process including:
- Conveyancer – A legal professional who will complete legal checks and help settle the property.
- Building Inspector – A builder who will review the property for any damage or structural issues.
- Pest Inspector – A professional who will examine the property for pest infestations such as termites.
After you sign a contract to purchase a property, if all goes well it typically settles after 30 days. This can be shorter or longer depending on your contract and state you purchase in.
Now that you own an investment property, you have to decide how you will manage it. Investors can choose to manage the property themselves. This includes advertising, finding and interviewing tenants, collecting rent, performing inspections and managing maintenance.
Many Investors choose to outsource the management to a Property Manager. If you are considering hiring a Property Manager, we wrote a great article on how to choose a good property manager.
Once you have made your first investment, it doesn’t mean you can sit back and relax, even managed properties or shares will require your oversite. Consider speaking to other professionals that might be able to assist you. You may want to speak with a lawyer who can advise you on investment structure or an accountant for tax purposes.
The information in this article, on The Invested and in the links provided are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions and consider speaking to a licensed financial advisor.