Investing in Shares Australia (Step By Step For Beginners) | ASX Stock Market 101


Hey, Everyone and welcome back to the channel. Over the past couple of years, I’ve been investing and helping other people to invest through my investing platform and through the youtube channel here. But I’ve never strictly made a video talking about how to invest in Australian shares for beginners. So that is what I’m going to do today and what you can expect from today’s video is I’m going to start by giving you sort of a brief explanation of what the stock market is and how it works. I’ve sort of simplified what you need to know before you invest in the stock market so that if you’re the very if you’re coming to the stock market for the first time and you’re just learning about investing then I’ve broken it down and made it really simple for you to understand as there can be a lot of noise that you think that you might need to know about but you really don’t. The second part of this video we’re going to talk about what you need to get started. So what are the things you need to collect and stockpile before you get started investing in the ASX. And lastly I want to go through my simple four step strategy that I used to invest in stocks how I analyse businesses how I find out if it’s a good business versus a bad business and also how I work out how much we should be willing to pay for it so that we can consistently find those are low risk investments that do produce those high long term returns. Those are the perfect types in investments that we’re looking for. So if you do enjoy this video make sure you leave a like. And if you want to see more stock market related content then consider becoming a subscriber. I post a lot of stock market related content about the US market and the Australian market. So if you’re interested please subscribe and hit the Like button. But for now guys let’s jump into the video. So just to start off I want to talk about how the stock market works because I understand that there’s probably a lot of people watching this video who really don’t know too much about investing and they’re really keen on getting it into investing but they just don’t know what it really is and they don’t really understand what they’re doing when they’re buying shares. So as simply as simple as I can explain it if when you buy a share you become a part owner in that business. Now it might not be you’re not an owner in the way that you might think. Some people think of business ownership as you running a business and making decisions and you being that the CEO that is not what we mean. You’re not managing the business you’re just an owner. So you’re in control of it and if you were the owner and you held all of the shares so you were the only owner of a company then you could decide who you wanted to be the manager. Now it could be you or it could be someone else but when it comes to the share market you only have one share out of maybe 50 million shares or maybe you have ten shares out of 50 million shares. So you have a very small piece of ownership you’re still an owner but you don’t have any power over who is running the business. So you’re just the owner. You collect the profits but you do not make management decisions. So management will be running the business on a day to day basis on your behalf on behalf of the owners. And what will happen is that business will produce some revenue and then they’ll have some expenses and whatever is left over after they’ve paid all their expenses that they’ve paid their employees their leases they’ve paid for the cost of the goods whatever’s left over is profit and management then makes a decision about where they’re going to put that profit. So some of that profit is going to be paid directly to the owners and that’s called a dividend. So this is a cash dividend which if you are an owner you will get a small amount of cash depending on how many shares you have paid directly into your trading account. So that’s called a dividend and that’s something that management can do with the money that is left over after the business has paid all their expenses. Another thing that management can do with that profit is they can reinvested in the business meaning they take some of that excess money and they buy some new land they buy some new buildings they invest in some more employees or new equipment they reinvest in the business in order to grow those profits into the next year. So maybe this year they produce 100 million dollars in profit and then they reinvested and next year they can make 200 million dollars in profit. So that’s all very well and good but how do you make money as a shareholder. How do we make money. Well the first way we make money is very simple. It was that dividend. So if management decides to pay out a dividend to shareholders you get a direct cash dividend a cash deposit into your account when that dividend is paid and for Australian shares this is traditionally every half year or every year. And on US businesses you’ll often see that they pay a quarterly dividend and there is some Australian businesses that do pay a quarterly dividend but that’s not the only way that you make money. Of course you paid a particular price for those shares. You might have paid 50 dollars per share. Now what can happen is with those reinvested profits that the business that the management reinvest into new employees and equipment and that sort of thing. If the business becomes more profitable so that now they’re producing 200 million profit instead of 100 million. Then people are going to be willing to pay more for those shares. So the price of those shares is going to go up and that is the other way that you can make money is if the price of the shares go up after you’ve bought it and you can sell that and you can sell it for a profit. Now there is a lot more that you could learn about the stock market there’s a lot of little intricacies that you’ll find on the Internet and you could spend hours and hours and days and weeks and months and years learning about all that all of the different little things about the stock market. But really what I just told you is all you need to know and it’s really two things. One is that when you buy shares you’re a part owner in a business an underlying business. And the second part is that you make money when the business produces profit. And as we said some of that profit will be paid directly to you and some of that profit will be kept in the business and should increase the value of those shares. And that is really all you need to know about how the stock market works before you go ahead and start looking at some businesses. So now let’s talk about what you need to get started in the stock market. What are the things you need to collect. What are the things you need to do before you go out and start buying businesses on the stock market. So the first thing that you need is cash and that’s pretty obvious but there’s a specific type of cash that you need this cash needs to be money that you don’t need for the next 10 years because you need to accept that when you’re buying a business it’s a long term investment. Don’t get into the stock market expecting that you can make some profits in the next couple of months and get your money back and then pay your bills. That’s not how it works. You need to think of it as if say for example you’re buying a house. If you buy a house you’re not expecting to get your deposit or you’re not expecting to get your deposit back anytime soon. You’re expecting to leave it in the property essentially and you hold onto the property for 10 20 30 years or maybe even longer. And you should have the exact same mindset when it comes to the stock market. When you buy a business assume that you can’t sell that business for the next 10 or 20 or more years. And the reason why you need to have that mindset is that the stock market every now and then does crash and we haven’t had a crash in a very long time. So it’s likely that if you’re going to be investing in the stock market starting now that you’re going to see a crash within the next five years and that means that your stocks are going to be down in price but you need to understand that that doesn’t necessarily mean that you’ve made a bad decision. It just means that the price of those businesses has changed. It doesn’t mean that the business behind those behind that stock price is actually worse than it was before. Now that’s a little bit more complicated. We don’t need to get into that right now. But essentially all you need to know is that you need excess cash that you don’t need and that you’re looking to invest for the very long term so that you can grow your wealth over the very long term. You also need to have no credit card debt. Now if you have credit card debt you should be paying that off first before you go out and invest in the stock market. And the reason for this is because on that credit card debt you’re paying an interest payment of 15 to 25 percent. So if you pay off that credit card debt you instantly make a 15 to 25 percent return because you no longer have to pay that interest. So you need to do that first before you go ahead and invest in the stock market. And the third and final thing that you need before you get started is a brokerage account. And this is a place where you’re going to be trading shares through and it’s where you’re going to be able to see what holdings you have and what kind of percentage return that you’ve made on those holdings. Now if you’re in Australia there are four major brokers that you could use. There’s the four major banks. There’s a Commonwealth National Australia Bank Westpac and ANZ. They all offer trading. Now there’s also some smaller brokers. But personally I would just stick to one of the four major banks if you’re just getting started because for me personally and with my investing style where we’re looking to make investments over the very long term it doesn’t really matter that the brokerage fees are going to be a little bit higher than maybe some obscure smaller broker. I would rather just keep my money in say CommSec in Commonwealth Bank where I know my money is safe because it’s a highly reputable bank and I would rather pay a little bit extra for brokerage for that added security. With that said it isn’t overly important because at any time in the future you can change broker. So this isn’t a one decision that you make and then you’re stuck with it for the rest of your life. You can change your bank broker you can transfer your shares whenever you want to. So just make a decision and if you really don’t know what you’re doing just stick to one of the four major banks. So for the last five minutes of this video I just want to talk about this force that process that I’ve been able to use to consistently outperform the market and it’s fairly simple. But what it allows us to do it is it allows us to filter away all of the rubbish stocks or all of the stocks that we will never want to invest in and we can find a small number of highly highly profitable businesses that are discounted that cheap. So they’ve got a low risk of going down further but they have a high potential to make us a lot of money. And those are the types of investments that I’m looking for. And this forced that process helps us get there. So the first part is circle of competence. And essentially what we’re looking for here is we’re looking to only invest in businesses that we are capable of understanding. So there’s certain types of industries like pharmacy or finance or resources even and these types of industries can be very difficult to understand unless you have a lot of experience in those industries. And then there’s industries that are a lot easier to understand like retail or a restaurant industry. These are fairly simple and that you could learn how to analyze these pretty quickly and this is where I would start if I was a beginner and further on from that I would start in industries that I already have a bit of a background in. So if you’ve worked in a particular industry then you might start looking in that industry because you would have a better than average understanding of how it operates and how businesses make money in that industry. The second step is with those businesses we need to make sure that we’re investing in businesses that have what I call an economic moat now an economic moat is essentially just a competitive advantage. So this business has something that’s unique to it only it has this competitive advantage. And that characteristic is giving it an advantage over other competition. So it’s drawing in customers from those other businesses in the industry and it’s protected in some way. The example that I often like to use is Google and their Google search engine. So whenever people say that you need to search something on the Internet people say go and google it. They use the name of the company when they’re referring to searching something on the Internet. And that’s a huge competitive advantage. And what it means is that Google search engine is used by ninety nine point nine per cent of people who are searching on the internet and whatever the other ones are Yahoo search it being no one even looks at them. No one even considers them it’s an automatic beeline straight to Google search engine whenever you need to search something and that’s a huge competitive advantage. And that’s the kind of thing that we’re looking for in these businesses and we’re looking to identify that just by the way I did just then that’s qualitatively just looking at the business. And we also tried to look at the numbers and identify it through looking at the long term numbers and seeing if they’ve consistently been able to grow in that industry. The third component is we need to assess management because as I said earlier where owners but we don’t control management where we’re not going to be able to boot them out if they’re doing something wrong. So we need to make sure that these people are honest and transparent and that they’re telling us all of the problems that are happening and that they’ve got a consistent track record of fixing problems within the business and weeding out bad eggs within the management and kicking them out and making sure that management stays a close tight niche group of people who care about the shareholders and then not only that they also need to be good at their job. They need to be consistently making good investments which property should they buy which equipment should they buy these decisions that they make at a management level will impact how much profit they make and how much profit we make at the end of the day. So we need to assess that and we’re also looking for businesses with management that doesn’t take on debt because we don’t want that risk that they can’t pay off their debt. So we’re really in the third part we’re really focusing on those people in charge making sure that they’re honest with us making sure that they’re making good investment decisions and making sure that they’re not taking on too much debt. And then the final component is called intrinsic valuation. So this is where we put a price on how much the company is worth and that price of how much it’s worth is equal to how much cash we’re going to get back over the next 10 years. What are we going to get out of this company. If I buy it today over the next 10 years maybe I’m going to get back 100 dollars per share. If that’s my intrinsic value calculation then how much am I willing to pay for 100 dollars over 10 years maybe I’m willing to pay 50. So I pay 50 now and over the next 10 years I get back 100 or maybe I’m willing to pay 30 and I pay 30 now and over the next 10 years I get back 100. That is what intrinsic valuation is estimating what the profits of this company are going to be in the future. Therefore how much are we going to get out of this company in those dividends and through the stock price going up and therefore how much are we willing to pay for those future cash flows. Now that was a very fast explanation of the four-step process that I use to consistently outperform the market and find those low risk high return investments. But if you’re interested in learning more about that four-step process I actually put together a 20 minute free training video on my website which you can get access to via the first link in the description below in that video you will learn why it is so powerful to be able to make your own investments in the stock market and to outperform the market and how exponentially better you will be off if you’re able to do that rather than just buying the index and accepting the market return of about 8 to 10 per cent. I talk about the four step process in a little bit more detail and I also talk about some of the major mistakes that beginners make when they start investing in the stock market. So if that is something that you’re interested in go and check it out via the first link in the description below. But I hope you guys enjoyed today’s video and if you did as I said earlier please leave a like and hit subscribe if you want to see more videos like this in the future. I have three videos coming out every single week so if that’s something that you’re interested in hit subscribe and join the team. But for now guys I’ll see you in the next video.

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