Understanding the sharemarket

Listed companies around the world range from tiny start-up ventures to household names. Shares can be bought in companies across every industry, from mining to manufacturing, telecommunications to transport. You can invest in exciting new technologies like AI and robotics, and in traditional sectors like banking and retail.  

If you’re starting out as a share investor you’ll need to decide whether to invest in Australian shares or international shares, or both. 

Australian shares

The Australian sharemarket can be a good place to start investing because you’ll be familiar with many locally listed companies such as the big banks, retailers and mining companies. However, Australia’s sharemarket accounts for only about 2.5% of the world’s total. In other words, you’re missing out on 97.5% of investment opportunities. 

If you plan to invest in shares by buying them directly yourself via a broker then the domestic market is the place to start. 

International shares

The world’s biggest companies are all found beyond Australia’s shores, as are most of the small innovative companies with aspirations to grow into the big global brands of tomorrow. 

Investing in international shares gives you access to more companies in different industries in different countries, and is therefore a great way to diversify your portfolio and benefit from growth opportunities not available in Australia. 

What is currency risk?

Currency risk applies to international shares. It occurs when movements in the Australian dollar relative to the currency of the country where your shares are listed have a negative effect on your investment’s earnings or value. Investment managers can operate a strategy called ‘hedging’ to offset currency risk. 

Sharemarkets are said to be volatile when the price of shares fluctuates rapidly over a short period. The term ‘market volatility’ is mostly used when markets are falling steeply, such as during the global financial crisis or at the start of the COVID-19 pandemic. 

Share prices of frequently traded companies can change continually during the hours its stock exchange is open. Prices move up or down according to supply and demand – if more people are buying than selling then the price will rise, and vice versa. 

A period of overall rising sharemarkets is known in the industry as a bull market, and falling prices indicates a bear market. 

Factors affecting share prices fall into three broad categories:

1. Economic, political and environmental changes:

• Interest rate movements
• Regulatory or legal changes
• War or political instability
• Foreign currency fluctuations
• Disruption from extreme weather events.

2. Changes at individual company level:

• Better or worse than expected profit results 
• Changes to key personnel or company strategy
• Reputational damage from legal action or media coverage
• Greater competition from new or rival companies
• New trends or technology making a company’s products unpopular or obsolete.

3. Overall market sentiment:

Sharemarket investors don’t always act rationally. Emotion and herd mentality play a big part in creating price volatility. Rumour and speculation can spark buying frenzies for certain stocks, driving prices to absurd heights only to crash back down. Pessimism can turn to collective panic and mass selling, sparking sharemarket crashes of the kind we saw during the global financial crisis or the Black Monday crash in 1987. 

For beginner investors it’s important – though not always easy – to ignore the noise and not overreact to market volatility and make hasty decisions. For most people, sharemarket investing is a long-term strategy which means holding your nerve in periods of volatility. 

Broadly there are two ways you can invest in shares: either by buying them directly yourself, or indirectly via a managed fund or similar type of investment. 

You can buy shares through a stockbroker, of which there are two kinds:

• Full-service brokers, who can advise you on what shares to buy and arrange your trade on the stock exchange in return for a fee
• Online share trading platforms, which don’t provide advice but will charge a set fee per transaction, which could be as little as $30 or even less. 

How much do I need to buy shares directly?

To buy shares on the ASX you need a minimum investment of $500. Most full-service brokers will have higher minimums than online trading platforms. 

The following financial products let you invest in shares collectively with other investors rather than owning shares as an individual. 

All three offer the benefits of diversification by letting you invest in many different companies for a relatively small outlay. They also let you easily invest in international shares, which is difficult to do on your own due to tax and legal reasons.

Managed share funds

Managed funds pool your money with other investors to buy shares in different companies. Instead of owning the shares yourself, you own units in the fund – how many you get depends on how much you invest and the unit price on that day. 

Unit prices are re-calculated and changed once a day relative to how the underlying shares are doing. The dividends the fund receives from the companies it’s invested in are paid to unit holders as distributions. 

Exchange traded funds (ETFs)

ETFs are similar to managed funds and are another way of gaining broad market coverage within one package. The key difference is that ETFs are themselves traded on the stock exchange, and their changing values are therefore shown in the same way as ordinary shares rather than as units in a fund. ETFs tend to invest ‘passively’ by tracking a sharemarket index and therefore tend to have low fees. 

Learn more about ETFs.

Listed investment companies (LICs)

Like ETFs, LICs let you invest in a ready-made share portfolio that is traded on the stock exchange. However, LICs tend to be more ‘actively’ managed, meaning they try to do better than a sharemarket index. 

The ASX 200 and S&P 500 are examples of share indexes. An index is made up of a set number of companies (200 and 500 in this case) whose performance is tracked, reflecting the collective upward or downward trend of the shares in the index.