Understanding Share Prices

Understanding Share Prices

Tuesday April 21, 2009

Understanding share prices is crucial when trying to make money on the share market, and if you haven't realised this already, it can be a speculative process. Even top investors and advisors can make mistakes, and there are many elements to consider when examining share prices.

It all sounds very scary, but in reality, the situation is quite simple, and you have control over your investment at all times. Of course, the trick here is that you must stay informed and employ an investment strategy to suit your financial goal, and you must also understand the risks involved with each investment strategy.

However, before going into these preliminary steps to investing, here are a few general rules that you can apply to greatly help your understanding of share prices.

Company Performance

On a basic level, share prices are determined on company performance. Mainly, supply and demand, market conditions and a number of factors specific to each business will power company performance, and selecting the best shares will mean picking a company that is going to perform well over a longer term.

It's a good idea to start with companies with transparent balance sheets and good business models that consider the current economic climate. This will often include looking at Australia's biggest companies, and these shares are often called blue chip shares. They are known for their long-term performance and stability.

Global Markets

Whether we like it or not, global economies depend on each other, and what affects one major national economy is likely to have an impact at the ASX. This is especially true when it comes to the US stock markets Wall St. While not always the case, what happens on Wall St is often shadowed the next day on the ASX.

Short Term Factors And The Australian Economy

If the share markets were easily predictable, we would never see share price crashes. Unfortunately, sometimes factors escape expert's predictions, and share prices will respond accordingly. For the long-term investor, this phenomenon is not so much of a concern.

However, for those of us looking to buy shares or liquidate shares we have held for some time, it becomes essential. The current share prices will often be affected by the state of the national economy, stock market reports and even large amounts of shares being traded on the stock exchange itself.

Many share traders actually make money on this short-term volatility and share price spikes, and these people are called day traders, or active traders.

Make Money Using Share Prices

Understanding share prices should give you a basic idea of how to make money with shares. However, so it is abundantly clear, let's have a look at some common strategies traders employ with varying degrees of risk and success.

Buy Low, Sell High

It sounds simple, but no matter how you look at it, you must buy shares at a lower price than you sell them. With a long-term trading strategy encompassing the right shares and advice, this is not a difficult prospect. A 10-year investment plan will see many investors sitting on impressive returns thanks to long term rising share prices.

However, over the short term, the amount of risk increases exponentially. This includes when you are thinking about liquidating assets after an extended holding period. Using tools such as margin lending and other stock trading tools aside from shares (such as derivatives) also increases the potential risk.

Know Your Limits

The minimum parcel of shares you can purchase on the ASX is $500, but most financial advisors recommend beginning with $4000 or more. Our advice to new investors is to perform as much research as possible and then speak to a financial advisor to fill in any gaps about an investment.

There is no reason you can't see worthwhile returns - even with a smaller amount of money - but don't expect to become a millionaire overnight without taking on an extremely high amount of risk. In many cases, a sensible investment will produce a return in line with the initial invested amount, i.e. a larger initial investment will see bigger returns.

Although, in recent times, many people are now trading online using discount brokers and trying short to mid-term trading strategies. The internet is an extremely powerful tool on the share market, and it provides advantages unavailable in the past. Know your limits, know your risks and invest wisely.

Diversify

As you may have heard, diversity is a great benefit to share ownership, and a diversified investment portfolio can protect against share price risks. You may even consider commodities, derivatives or managed funds in your overall portfolio. At least, you should consider shares from different industry sectors. If share prices in one company or sector crash, your diversity will reduce the chance for loss.

Not so long ago, it took substantial amounts of money to truly diversify a portfolio. However, now, online stock brokers are providing small investors the chance to diversify with share packs.

A share pack is a pre-packaged product constructed by a financial professional, and it is designed to allow retail investors to put money into numerous top companies with potentially minimal outlay. More information on share packs is available through the providers, and you must always research any investment thoroughly.

Live Share Prices

The ASX provides price updates close to live share prices for free (there is a 20 minute delay), and you can find daily, weekly and monthly information for specific companies too. Many of our sponsors provide live share prices too, and this can be through online trading platforms and other internet-based methods.

For the latest share price news, check out our news section that contains stock market reports and other recent information. Of course, Australia's related top media outlets report on the Australian stock market throughout each day, and it is good trading advice to follow current share news from a variety of sources.

For more information on stock brokers, Australian shares and the process of buying shares, make sure you take the time to explore the rest of stockmarket.com.au.