Introduction

I said these important words in the first three editions of this book, and now I’m saying them again — thanks for choosing Share Investing For Dummies. In this fourth edition, I bring you up to date on how the Australian sharemarket is dealing with the massive societal and economic changes wrought by the global COVID-19 pandemic; as it happens, in the introduction to the third edition I talked about bringing readers up to date on how the market was recovering from the massive financial storm that hit it (and all its global peers!) between 2007 and 2009, during the global financial crisis (GFC). Just as the GFC and the market slump that ensued eventually receded into history — despite denting many investors’ faith in investing in shares — I’m reasonably confident that COVID-19 will do the same.

In any case, just as in the preceding editions, such changes in the sharemarket give me a backdrop to set out how, despite the scary headlines and the ever-present possibility of a market fall, profitable companies continue to generate capital growth for their shareholders over the long term. The great paradox of the sharemarket is that while it is the most volatile of the asset classes, it is also the one most capable of reliably building wealth over the long term for the individual investor; I show you how in this book.

I’ve attempted to describe some of the wondrous investment stories that have played out on the corporate paddock since the first edition of the book was published 21 years ago — as well as some of the less luminous stories that are always possible when you’re investing in shares. This fourth edition also updates my advice on where to start if you’re a first-time investor, some of the newer tools that are available to you, some of the pitfalls to avoid and how to have fun (and not take too many risks) while your money goes to work for you.

Australia has grown and developed in many directions since the first edition of Share Investing For Dummies welcomed investors taking their first steps into the sharemarket. If you followed the first three editions, you’re hopefully now managing a portfolio, researching stocks that interest you, keeping abreast of the daily market play and boosting your initial investment to something that’ll at least pay for your dream holiday and at best see you comfortably through the years.

In many of the speeches and presentations that I’ve made around the country in 33 years as a finance journalist, I’ve tried to present the sharemarket as a hugely interesting institution. Because it is! And, moreover, this market, which touches everyone’s lives in one way or another, doesn’t have to be daunting. The sharemarket is not a hard concept to understand. When people say to me that I make the idea of buying and selling shares understandable for them, I curse whatever it was they’d been reading or hearing that made it appear the opposite.

About This Book

Share Investing For Dummies explains the sharemarket’s intricacies in terms that anyone can understand. Although the sharemarket looks like a high-tech computer game, with its flashing lights and scrolling letters and numbers on the trading screens, the sharemarket is actually based on a very simple concept. Companies divide their capital into tiny units called shares, and anyone can buy or sell these units in a free market at any time. Companies use the sharemarket to raise funds from the public, and the public — meaning you — invests in the companies’ shares. You invest your money in shares because you expect to get a better return in earnings than with other investments.

Most of the time the sharemarket is profitable for investors. Despite the occasional spectacular market fall, such as the great ‘bear market’ of 2007 to 2009 — or even the odd collapse of one of its constituent companies — the sharemarket generally plods along making money for its investors. The sharemarket revolves around money, but it is also very much a human institution. The sharemarket is sometimes described as a living entity (for which we finance journalists are often mocked). Oddly, the sharemarket does have human moods because it reflects the greed or fear of its users, who are sometimes very human.

Greed is a powerful influence on the sharemarket, and so is fear. A saying on Wall Street suggests that these two emotions are the only influences ever at work on the sharemarket, and they fight a daily battle for supremacy. On a day-to-day basis, the sharemarket wavers between the two. The 2000s began with the fear of the ‘tech bust’, then switched firmly to greed for the middle part of the decade, only for fear to come roaring back into the spotlight in late 2007. Greed regained its primacy in early 2009 and — despite a major interruption in 2020 as COVID-19 reared its ugly head — the ‘risk-on’ approach of viewing the sharemarket as a money-making machine has prevailed virtually right through until the time of writing. All of which goes to ensure that fear will have its day again, and sooner rather than later.

The sheer range of activities of the companies listed on the Australian Securities Exchange (formerly the Australian Stock Exchange) makes it a very interesting place — if a trading system that you can see only on computer screens all over the nation can be called a place. The number of different types of shares you can invest in is mind-boggling — perhaps there is too much choice. As an individual investor, you can’t own every type of share so the solution is to come up with an investment strategy.

As you will discover, of the 2,200 or so stocks listed on the Australian Securities Exchange (ASX), most investment professionals confine their activity to about one-sixth of them. Even in the 500 stocks that comprise the S&P/ASX All Ordinaries index (one of the Australian sharemarket’s main indicators), the last 1,900 or so don’t hold much interest to Australian fund managers. This is where a self-reliant investor like you can find some undiscovered gems caught in that bind of being too small to attract the fund managers’ and brokers’ attention, and then remaining small because they can’t get this attention. Some of the sharemarket’s acorns really do become great oaks. As a self-reliant investor, with the knowledge and the time to thoroughly research potential stock purchases, you can really steal a march on the pros.

It gets harder and potentially more rewarding the deeper you delve into the sharemarket. In the bottom 1,900 or so stocks, you may find some real dogs that should not be listed (and probably won’t be for much longer), but you can also discover wonderful companies that are about to flourish. This kind of investing is called bottom-fishing. You need to be wary and know how to back up your discoveries with solid research. At these depths of the market, you can make some very wrong moves.

You don’t actually have to own some of the 2,200 stocks in order to experience the ups and downs of the sharemarket; one of the big changes in the market in the last two decades has been the introduction of (and growth in) simple and cheap listed instruments that give you instant, diversified exposure to the sharemarket (whether you choose the Australian, US, global or other country markets) and asset classes in general. Access to the sharemarket has never been easier, and I take you through that, whether you want to invest at the individual stock (company) level or the index (sharemarket itself) level. The tools that enable you to get into the market intelligently are right here in this book.

The sharemarket should be an essential part of everybody’s investment strategy. Sharemarket participation in Australia is among the highest in the world, but too many people still don’t understand its benefits. As the nation’s population ages and superannuation grows in importance, the amount of Australians’ investment assets (and retirement nest eggs) going into Australian shares is set to rise dramatically. My aim in this book is to help you understand the sharemarket so that you can control your future financial security.

Foolish Assumptions

This book doesn’t require you to have any prior knowledge of investing in shares — that’s my job. However, I do make a few assumptions about you — I assume you’re interested in the sharemarket and you want to find out a bit more. Perhaps you’ve read a few blogs, watched a few YouTube videos or read other books that piece together various aspects of share investing, and you’re looking for something to help you turn the theory into reality. Perhaps you’ve already traded shares online at some stage, or maybe you’ve realised that the bulk of your superannuation is held in shares, and you want to know why — and how that works.

Wherever you’re starting from, this book is designed to help you build on your existing knowledge and develop your understanding of the sharemarket and the things that influence it — for good and bad.

Icons Used in This Book

Throughout this book you see friendly and useful icons to enhance your reading pleasure and highlight special kinds of information. The icons give added emphasis to the details that I think are extra important.

Take extra special notice of this piece of information. You may find this detail is something to store away for...