How does the share market work? A quick intro

I just need to know about:

What is the share market?

The share market is a virtual place where people can buy and sell a stake in certain companies. If you have shares in a business, you are its part owner.

How do people make money on the share market?

Money is made when a shares in a company are sold for a higher price than they were bought for (a profit). Some companies also give out payments when they are performing well. These are called dividends.

What makes a share price change?

Whether the price of a share goes up or down depends on whether other people choose to buy or sell into that particular company. All other things being equal, if lots of people buy, the price should go up; if they sell, it should go down.

Often people buy shares in multiple companies that do different things and operate in different countries. The hope is that if one company goes down in value, others will go up or stay the same. The thinking is if money is lost on one company, other companies may make up for some of the losses. Keep in mind, this isn’t always the case and sometimes lots of companies lose money at once.

Is share market investing safe?

The share market is considered riskier than some other types of investment, such as keeping your money in a savings account. This is because the market – and the price of companies you may own – tend to change a lot. Sometimes this can mean people make more money than they would in other investments, other times it means they can lose more.

While no investment is safe, other investments may not go up and down as frequently.

For this reason, share market investing is typically done by people who are prepared for the risk that things could change at short notice.

Before you start investing in shares, it’s important to make sure you are OK with the risk that you may lose money. It can often help to discuss this with an expert, such as a financial adviser.

How much do you need to buy shares?

Generally the smallest amount people invest in shares with is about $500.

You are also charged each time you buy or sell shares. Sometimes this is a flat fee between about $5 and $25, others charge a proportion of the amount you are buying or selling.

What are dividends?

When some companies make money, they give a little bit of it back to their part owners or shareholders. This is called a dividend and may happen a couple of times each year. Not all companies pay dividends.

If a company has paid a dividend, shareholders then have a choice to reinvest the money back into the company or to take the money and keep it.

How do you start investing?

  1. To invest in shares, you need what’s called a broker. The broker will carry out the buying and selling when they are told to.

You can either choose an online broker – which will allow you to choose what to buy or sell yourself, often via an app or online – or a full service broker –  which allows you to call or email and may offer some advice (these are called full service brokers charge more than online brokers).

  1. Once you have selected your broker, you can set up an account. You often need to enter details including some proof of identification (such as a passport or driver’s licence), your bank details and your Tax File Number.

You can read more about how to set up a bank account here and a Tax File Number here.

  1. Next, you can choose what you would like to invest in and what you would like to achieve. This will take a bit of research. MoneySmart has a guide about different types of companies you can invest in. You can check it out here.
  2. Once you have chosen your companies and how many shares you’d like in each, you can place an order with your broker. Sometimes it will take a little while for the order to go through. The share market is only open certain hours and sometimes brokers have other orders in the queue.

Once your order has gone through, you’ll get a notice saying you are the new owner of a batch of shares.

Where can I learn more?

The ASX has a series of videos that explain how share market investing works and a game you can play without having to put money in. You can access it here.

Note: This article is not financial advice or a substitute for financial advice. Before making investment decisions, it’s important to seek expert advice and understand the risks in relation to your situation. No form is investment is right for everyone.

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