Share Trading Account Australia

Share Trading Accounts Australia

Australians are some of the keenest share investors in the world. The ordinary person in Australia is more like to own shares in large public companies than any other nationality and with so many sellers in the market deliver mixed, often confusing messages, it can be very difficult to know which way to turn. Indeed, any person who has ever worked as an employee in Australia should have a super fund which is usually invested to a great extent in the share market. So like it or not, knowing something about the stock market is pretty much avoidable for most people. An appropriate strategy for share investing will always depend on your age and stage of life and financial circumstances. This is why it is very important to make considered and well researched decisions when deciding to invest and where to invest your hard earned cash.

If you have not been exposed to the rapid changes which can occur in stock markets, investing in it can seem like a daunting and bewildering process, but have no fear, as Warrne Buffet, arguably the worlds most successful stock investor has said, which is that to invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight or inside information. Over thirty years ago he wrote,

"What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework".

Much of the movement in markets is driven by perception and psychology as well rather than underlying economic reality and it is interesting that psychologists have found that most investors are far more psychologically averse to loss than they are positive about the prospect of gain. There are a number of standard strategies which prevent serious losses being incurred on the stock market and still leave open the opportunity for substantial gains.

Strategy 1: Diversification

There is an old saying which says 'don't put all your eggs in one basket'. Its as true for stocks as it is for eggs. Portfolio diversification is a basic tool to limit loss. If you buy BHP, Rio Tinto, Zinifex and Xstrata all at one and nothing else, what is going to happen if commodity prices drop by 50% tomorrow? Your entire investment could disappear. It is important to buy a range of different share assets diversified by company size, industry and risk profile (aggressive or conservative). You do this quite easily. Make a rule for your self that you will never become exposed by more than 10% to one particular industry, company or asset class.

Strategy 2: How to limit your losses

Secondly, the share investor/ share trader needs to detail the amount of loss they are prepared to accept for each stock purchased. The table below clearly shows why cutting your losses early is an essential part of an investor or traders business plan.

Mounting losses can be very damaging to maintaining a profitable investment arrangement. This is because profit required to recoup losses grows exponentially as losses mount. For example, if you invested $1000 and it fell to 50% of its original value or $500, you would need a 100% profit to return to original value and if the investment dropped to10% of its original value, you would need a 1000%.

The following table illustrates this:

AMOUNT LOST (%)	Profit Needed To Recoup (%)
10%	11%
20%	25%
30%	43%
40%	67%
50%	100%
60%	250%
70%	335%
80%	500%
90%	1000%

For the "sit and forget" investor, when it comes to badly falling stocks, it is important that the individual seek advice from industry accredited professionals and then act. Many individuals fail to act only to see their capital asset base shrink. As the share market is a serious business, the individual investor/trader needs to apply the same business concepts as would a business with a failing product. If a company's product line suddenly fails to sell, the product line is either changed or dropped in order for the business to survive. The same principle applies to the holder of a share that is in a downward spiral: the share needs to exited to save the wider portfolio from further capital loss.

Strategy 3: Avoid Portfolio Churning

All though it is important to maintain a variety of different stock investments, the process of continuously buying and selling stocks incurs undesirable transaction costs on you mainly in the form of brokerage fees. If you make to many transactions, you could wind up lining the pockets of your broker and making yourself a lot poorer in the process. Once you have carefully selected a purchase stick with it for a while until it reaches your loss limit or comes good for you. Usually unplanned and impulsive decisions are unhelpful to the long term growth and maintenance of wealth.

Strategy 4: Plan to Accumulate by contributing regularly

Making even a modest but regular contribution over the long term is much more effective than a large short term lump sum investment. This is because the power of compound returns applies just as powerfully in the stock market as it does in a saving account. After 10 years at a return of 5%, reinvested company dividends can build up a portfolio double the size without reinvestment. You can see the power of compounding returns from this example:

Example of Savings and what you can earn by starting early

Two different individuals--James and Bonnie, each 22 years old--have an extra $2,000 a year to invest or spend as they choose. Darryl opens a Savings Fund to start saving. Bonnie chooses to spend her $2,000.

In this example, James's IRA earns 12% per year. James saves $2,000 per year for six years, then never puts another cent into his IRA.

Bonnie spends her $2,000 per year for six years. After that time, she invests $2,000 per year until she is 65 years old. Bonnie earns the same 12% interest per year that James does.

The chart below shows the value of James's and Bonnie's respective HISAs, from the time they are 22 years old all the way to 65. Keep in mind, James's total investment is $12,000 ($2,000 per year for the first six years), while Bonnie's is $74,000 ($2,000 per year for the last 37 years).

Age	James	Bonnie
22	$2,240	$0
23	4,509	0
24	7,050	0
25	9,896	0
26	13,083	0
27	16,653	0
28	18,652	2,240
29	20,890	4,509
30	23,397	7,050
35	41,233	25,130
40	72,667	56,993
45	128,064	113,147
50	225,692	212,598
55	397,746	386,516
60	700,965	693,879
65	1,235,339	1,235,557

So James only had to invest $12,000 and could spend the rest of his savings. Whereas Bonnie had to save $2,000 for 37 years of her life to get the same savings as James.

As you can see, with compound interest, the earlier you start saving, the greater the accumulated interest on your original investment. The important thing is to start saving your money. The best time to start saving is now--no matter how large or small the amount. It's never too late to start. Remember, today is the first day of the rest of your life, so get time on your side and plan for your future by starting to save--now.

Conclusion

So there you have it, Share Trading Accounts Australia's four simple beginner's strategies for effective long term share investment. Have a thing about it and then take up a plan today, it could mean you are much wealthier in retirement.

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