Welcome to lesson one of our Investing Basics course! Over the course of five short lessons we will teach you the basics of investing in shares. Investing is a huge topic, and there is a lot more to learn than what we are able to cover here, but this course will give you a solid foundation. At the end of these short lessons you should feel confident in buying your first shares and starting to build a portfolio of investments.

In this first lesson we will look at:

• What a share is
• What a stock market is
• Different types of shares
• The process of buying and selling shares

Lets get started!

What is a Share?

A share is a type of asset that represents a partial ownership of a company. It means that you, as a shareholder, own a portion of the company and are entitled to a part of the company’s profits.

However not all companies offer shares for sale.  Only public companies offer shares that you and I can buy. To become a public company, strict regulations must be met and they must go through a process called an initial public offering, or IPO. This is where the company’s shares are listed on stock markets. Public companies are also required to regularly report on their finances in earnings reports.

When a company lists its shares on a stock exchange, they can then be bought and sold frequently on the stock markets. The goal of trading shares is to, of course, make money as the value of your assets – hopefully – increases over time.

To put it simply, as an investor, you want to buy shares when they are cheap, and sell them for a profit.

What is a Stock Market?

A stock market is a network of exchanges where shares are bought and sold. Although shares were once bought and sold in-person on trading floors, almost all trades are now done electronically. Australia’s primary stock market is the ASX.

Stock markets are a central part of modern economies as they allow companies to raise large amounts of money in order to grow their business and pay off debt amongst many other things.

Stock markets are regulated by government-backed organisations that oversee trading activity and ensure that the rules are being followed. Australia’s stock markets are regulated by the Australian Securities and Investments Commission (ASIC).

Types of Shares

Shares are grouped in different ways in order to help investors understand their characteristics and decide whether they should buy. The most common way of categorizing stocks is by market capitalisation, or market cap for short. This is the total value of a company’s shares, so if a company issues 10 million shares at $100 each, their market cap would be $1 billion.

Large Cap and Blue Chip Shares

Large cap shares are those from companies with a market capitalisation of $10 billion dollars or more. These companies are generally leaders in their particular industry, and are household names. The term ‘Blue Chip’ means the company is very well established with a long history of financial stability and growth. Large cap and blue chip companies have less potential for growth, but are less volatile. Large cap shares are often, but not always, also called blue chip shares because of their long history. However not every large cap share is also a blue chip one.

Mid Cap Shares

Mid cap shares are those from companies with a market cap between $2 and $10 billion. They represent a middle ground between large, blue-chip companies and small companies. They have more growth potential than blue-chip companies with less volatility than small-cap shares.

Small Cap and Penny Stocks

Small cap shares are those from companies with a market cap of less than $2 billion. Penny stocks are those that trade for $5 or less. This category is made up of small, less well-established companies in the early stages of their development. They have the potential for huge growth, but are a lot more volatile and riskier to invest in.

Growth Shares

Shares are grouped by more than just their market cap. These can include the dividends that they pay, their price relative to the company’s value, and their potential for growth.

Growth shares are those of companies that are expected to grow much faster than their competitors. These companies prioritise reinvesting profits into growing the business over paying a dividend. They tend to have higher valuations because of their growth potential and, as such, can be more volatile.

Value Shares

Value shares are those of companies whose share price is less than their intrinsic value. Investors in value stocks look for companies trading at a lower share price than their growth potential and overall financial health suggest. Value shares can be from established companies experiencing a downturn, or from new companies with growth potential others have overlooked.

Income Shares

Income shares are shares that provide a predictable, steady income in the form of dividends. Dividends are usually higher with income stocks and are the primary way they return value to shareholders. They have lower potential for growth, and are therefore less volatile than growth shares.

How to Buy Shares

To buy shares you will need to open an account with a regulated broker, though it is also possible to buy shares directly through IPOs, crowd funding and employee share schemes.

You will then need to do some research into which companies you would like to invest in. You should also have a risk management plan in place to ensure you don’t risk more than you can afford to lose.

In Australia brokers are not allowed to enter orders into the ASX system when the market is closed. The Australian stock market is open from 10am until 4pm Sydney time Monday to Friday.

There are set 3-hour periods before and after normal trading hours known as the pre-open and adjust periods. During the pre-open period brokers are able to enter new orders into the system in preparation for the market open. During the adjust phase brokers are able to cancel and adjust existing orders. For some international markets it is possible to buy and sell shares out of hours

Key Points

• A share is a type of asset, representing part-ownership of the company. It entitles you to a portion of the company’s profits
• A stock market is a network of exchanges where shares are bought and sold.
• Shares are grouped in different ways in order to help investors understand their characteristics and decide what to buy.
• The primary categories of shares are large cap and blue chip shares, mid cap, small cap and penny stocks, value, growth and income.
• Shares can be bought and sold via a regulated broker. It is also possible to buy shares directly through IPOs, crowd funding and employee share schemes.