Ok, so you're new to investing, you've got some spare cash you want to invest and you're ready to buy stocks. Where do you start?
Good question.
It depends on how much you have to invest, but for the sake of this article, we'll assume you have a small amount to invest, and that you already have an online brokerage account. If you don't, you can instead start with our 13 Steps to Financial Freedom.
The way to ease yourself into the market is by buying one stock or security that gives you instant diversification across multiple stocks. That gives you protection by spreading the risk across many companies, and means you are less likely to suffer a catastrophic loss first up.
The typical way would be through a listed investment company (LIC) or an Index Exchange Traded Fund (ETF).
A listed investment company is basically a fund manager that invests a large sum of funds across many companies. The largest and most well-known LICs include Argo Investments Limited (ASX: ARG), Australian Foundation Investment Co.Ltd. (ASX: AFI), Djerriwarrh Investments Limited (ASX: DJW) and Milton Corporation Limited (ASX: MLT). The ASX has a complete list of LICs here.
All four companies invest funds into many Australian stocks listed on the ASX, pay healthy dividend yields and will closely track the performance of the Australian market.
The other way could be through an ETF. You can see the vast variety of ETFs on the ASX website here. As a starting place, you might want to select an ETF that covers the Australian market – and ignore the more exotic ones for now.
That leaves us with a couple of options, including the SPDR S&P/ASX 200 Fund (ASX: STW) which owns every stock in the S&P/ASX 200 (ASX: XJO) Index, or the V300AEQ ETF UNITS – Vanguard Australian Shares index (ASX: VAS) which owns shares in all 300 companies in the S&P/ASX 300 (ASX: XKO). There are other options of course – but first time investors would probably want to stick to the large broad-based ETFs.
Note that buying shares in an LIC that tracks the Australian market and an ETF such as the ones above will likely give you similar returns over the long term, as they are investing broadly in similar stocks. As the banks and the two large resource companies BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) make up a substantial portion of our index, your returns will be largely driven by their performance, regardless of whether you chose a broad-based LIC or ETF.
For a novice investor, it would be hard to go past buying shares in one of the four LICs or either of the ETFs mentioned above for your firstr purchase. Stay tuned for upcoming articles on things to watch out for with LICs and ETFs, as well as how to build your portfolio from your first stock.
