I’ve noticed that for many of my friends and family buying shares is a mysterious and complicated process. They are more comfortable buying a house than trying to navigate the stock market! Not to mention the fear of losing all their money and the bad reputation shares have as an investment in this country (a hangover from the 87 crash). The irony is over 2.5 million New Zealanders have signed up for Kiwisaver and most will have some component of their retirement savings in the form of shares.
Choosing stocks yourself can be a difficult task, there is a lot of research available that you have to wade through and buying based on “gut” feeling alone isn’t really recommended. So its no wonder that most of us leave it to the professionals and get lured into investing in managed funds (whether in Kiwisaver schemes or not). The downside is that the purpose of these funds is to make money for the fund manager and they tend to do this by charging you lots of fees that eat into your profits (this is just my cynical view on it!). There is a good alternative to managed funds available, they require little management and charge the lowest fees. They are called index funds and are a very good entry point for investors who don’t have the time or the inclination to get deeply involved in researching companies, tracking balance sheets, following business news and all the other work required in picking your own stocks. They basically mirror the stock market and they are diversified covering loads of companies.
If you’ve got a handle on index funds and want to spice up your investing life with some individual stock purchases it really is quite a simple process. Its no harder than setting up a bank account or applying for credit. Here is a little information to help you get started and familiarise yourself with the process.
- Set up a brokerage account – This is the hardest part, if you are already with a bank that offers the service then its a bit easier. Basically you need to have verified copies of identification (e.g passport, drivers license signed by a justice of the peace or similar), a copy of a bank deposit slip AND proof of address (e.g a govt letter, council bill, power bill with your name and address). Gathering these is easy but it takes time and is a pain in the ass.
You’ll also need to figure out your tax witholding rate. In NZ all the taxes are collected as dividends are paid out so the only obligation you have is to keep your witholding tax rate up to date. How handy is that! And no capital gains taxes for most investors (you have to be acting like a real bad ass day trader to attract the IRD’s attention, if you’re buy and hold you’re sweet).
Now you’ll be asked to open a brokerage bank account, this is where you’ll put the money used for buying shares and it’s where the cash will end up when you sell shares. You can even have your dividends paid directly into this account (much better than having to deal with cheques). I’m with ASB securities, I’ve found them pretty chill to deal with. There are other brokerage companies that offer the same services, so do some research. You can start the application process online.
- Common Shareholder Number CSN – You’ll be assigned one of these numbers after you sign up for a brokerage account. It’s how they track which shares you own. It’s your unique identifier. It will be sent to you old school styles in the mail. You’ll need to keep this in a safe place.
- Faster identification number FIN – You’ll also be sent a FIN. This is like your pin number for trading, 4 digits and easy to remember….maybe. Actually keep this in a safe place too. Again this will come in the mail.Other fun things to know!
The share registers (places that keep track of what shares you own) in New Zealand are Computershare and Link Market Services. Different companies use one or the other for taking care of the shares. You can get logins for both companies once you have a CSN (Common Shareholder Number) and they will send you snail mail or you can sign up for emails. They will send you mail every time you buy and sell shares letting you know your holdings. They keep records of dividends too.
OK I have a brokerage account now what?
- Put money in your account! – You need cash to buy those shares so set up some payments and get saving.
- Pick a stock – Once you’ve done your research and you are ready to buy you’ll need is the companies stock code. e.g. Auckland International Airport is AIA.
- Click on the buy button. – Somewhere on your brokerage site will be a button to buy, all you need to do is find it. Keep your stock code handy and enter it on the buy screen.
- What’s your price? – Buying shares is kind of like an auction, you decide what price point you want to buy at. In a way you are saying to the market how much you think the stock is worth. So you can put a limit order in for slightly less than the share last traded at to grab a discount. You can put a limit order in for any set price, you get to decide! However someone has to be willing to sell the shares at that lower price. If no one wants to sell their shares your order may sit there for a while.
The other option is to buy at market. Your order will go for the current price offered by sellers. This is a faster way to buy.The opposite applies when you come to sell. You can set a limit sell order to make sure you get the price you want or you can sell at market.
- HANG ON, WAIT A MINUTE! – How many shares should I buy? Well that’s a good question. What’s your budget? Lets say you have $3ooo. You can simply divide the $3000 by the share price and you can get an idea of how may shares you can afford to buy. Most brokerage accounts in NZ also charge a $30 fee (OUCH!) for each transaction. So you’ve got to take that into account. Buying only $300 worth or shares and paying a $30 fee doesn’t make much sense. Your share would have to increase in value by 10% to recoup the brokerage cost. If you can save up $3000 it makes the fee only 1% of the transaction, a much less painful figure.
$3000 minus $30 fee divided by share price….. gives you the number of shares you can afford. If you set a limit price you know exactly what you are going to pay. If you set a market price you might want to make sure your brokerage account has a little cash buffer to account for any price movements.
However that’s not all you have to consider. There is a minimum limit, you can’t just buy 1 share here and 2 shares there.
Minimum purchase amounts for Shares on the NZX.
2,000 Where the price does not exceed 25 cents
1,000 Where the price exceeds 25 cents but does not exceed 50 cents
500 Where the price exceeds 50 cents but does not exceed $1.00
200 Where the price exceeds $1.00 but does not exceed $2.00
100 Where the price exceeds $2.00 but does not exceed $5.00
50 Where the price exceeds $5.00 but does not exceed $10.00
25 Where the price exceeds $10.00
e.g if a share price is $1.23 you would have to buy 200 shares for $246. If the price was $8.45 you have to buy 50 at a price of $422.50. Easy! Its just a little bit of basic math. For the most part you’ll probably want to buy parcels of shares larger than $1000 to minimize the impact of brokerage costs.
- Ok I’ve set a price and number of shares – Sweet, confirm the order and sit and wait…. if its successful you’ll get an email confirming the purchase. You’re the proud owner of some shares! Or maybe the offer will be too low and nothings gonna happen. If you really believe that the price you are offering is fair just sit and wait the marker may move and meet your offer. Orders made via ASB securities are valid for 30 days and the price may just drop to where you want it. You can amend your orders, cancel orders, create new orders at anytime so don’t panic.
I hope this post has given you a little more confidence and given you some insight into just how easy it all is. At the very least maybe I’ve demystified it a little. There are plenty of optionS out there for you to get exposure to the share-market without doing it yourself but its easy enough to give it a go. Having a few percent of your total investments in individual stocks that you picked yourself makes it that much more interesting and satisfies my desire to meddle. I leave 98% of my investments alone but I can buy and sell my pet companies, feel like I’m doing something for my future without jeopardizing the majority of my investments.