Before you start investing
First step to investing is understanding your budget, how much you would like to invest and how often you would like to invest and what is your investment objective. Then it’s important to understand how long you are looking to invest for and what level of investment risk you are comfortable with.
Once you have familiarised yourself with these elements, it will help reduce any unexpected surprises in the future.
Let’s step through all four aspects.
1. Investment budget – It’s important to understand to understand how much you can afford as an initial investment and if you choose to continue making regular investments, what does that look like in context of your other life expenses. Always be sure that you do not overextend yourself financially and be realistic.
2. Investing goal or objective – ensure you understand the vision you have for your investment in terms of your expectations. Is this investment to buy a car, grow a home deposit, or to create future wealth.
3. Investment timeline – connecting from understanding your objective this will help you determine for how long you need to hold the investment, is it for the short term (less than 18 months) or medium term (targeting 3-5 years) or the long term (over 10 years).
4. Investment risk and return – Everyone is different and depending on your personal circumstances and preferences, risk is a very important aspect to understand. Higher risk means higher potential for returns and lower risk means lower potential for returns, however depending on your budget, objective and timeline you will need to consider what level of risk versus return you are comfortable with.
Having understood the above this will allow you to then select what type of investment is suitable for you.
What are the options?
The most common investment options available for those who are starting to invest with less than $1,000 are managed funds, shares and ETFs.
Managed funds – In a managed fund, your money is pooled together with other investors. The investment manager then uses that money to invest on your behalf, giving you exposure to a range of assets such as shares, property and infrastructure. You’re allocated units in the fund, which are based on the unit price at the time you invest. The value of your investment can change if the value of the assets within the fund goes up or down. This will be reflected in the daily unit price.
Shares – Shares offer investors the opportunity to invest their funds in a company of their choosing. When you buy a share, you own part of a company. Your investment grows as the company’s value increases or when it pays dividends (a portion of profits distributed to shareholders). Reinvesting dividends and holding shares longer term can allow your money to grow through compounding.
ETFs – Exchange Traded Funds (ETFs) trade on the stock market like individual shares. They let you invest in a group of companies, assets or industries in one simple trade.
Shares and ETFs can be traded via the ASX, with a minimum initial investment of $500 (excluding brokerage); this is also known as the ‘minimum marketable parcel’ (MMP).
As with any investment though, it's important you fully understand the benefits and risks before making any decisions.
What are the fees and costs of investing?
Fees and costs are another important consideration as part of investing, particularly when starting out with a small amount – to ensure that you maximise your returns.
Managed funds – There are two main fees and costs that you will encounter when investing in a managed fund.
- Management fees and costs – these are fees and costs charged for managing your investment and is expressed as a percentage.Transactions costs – these are costs incurred when buying and selling underlying investments (assets) and is expressed as a percentage.
These costs are generally deducted from your unit price.
There may also be other fees and costs charged directly or indirectly, depending on your managed fund provider.
Shares & ETFs
- Brokerage fees – To trade shares and ETFs on the share market / stock exchange, you will need the services of a broker, whether it be a person or a digital platform, who will execute trades on your behalf. This service comes at a cost, and you will be charged a brokerage fee.
There may also be other fees and costs charged in relation to your broker of choice.
