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How do I begin investing in the sharemarket?

Wednesday 23rd January 2002

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Q: I have just inherited $200,000 from an estate and I'm considering investing a proportion with the share market. I'm a total novice in this area and as a result need some elementary advice. I feel the best way to seek the information I require is to set up a scenario, so here goes:

I wish to buy 1000 shares in company A through a broker. The selling price is $1 per share. I ring my broker and advise of my intention. What happens next? Will the shares be automatically available to me there and then at the sell price? If not, why not? Will it cost me $1000 minus broker's fees, and how much will the broker's fees be? Assuming that transaction takes place and the shares go up to $1.50 over the next 3 months and I choose to sell, would I connect with my broker and be able to sell immediately for $1.50 less broker's fees. I guess my questioning is whether it is just a matter of buying and selling or before I can buy or sell does there have to be an available buyer/seller, and if there isn't, what happens next?

A: For beginners, the first foray into direct investing can be daunting, but you are going the right way about making everything as smooth as possible.

For a start you will need to open an account with a broker. You can't just ring and hope your order to be executed. To open an account you will have to fill in the broker's application form, provide at least one form of identification and possibly a deposit to cover your first purchase.

When it comes to the purchase or sale of shares, you look up a quote. A quote is the highest bid and the lowest offer for any given share. Whether or not you will be able to transact the total 1,000 shares will depend on the market depth for the shares you are interested in.

For example, say you would like to buy some Contact Energy shares. When you ring your broker the market for Contact Energy might look like this:

BidOffer
5,000 @3.003.02@ 500
1,000 @2.993.03@ 10,000
500 @2.993.04@ 1,000

If you wished to purchase 1,000 Contact Energy shares at the lowest offer there would not be the stock available to fill your order straight away. You could buy the 500 shares and sit at the top of the bid @ 3.02 for the remaining 500 shares. This will not cost you any more in brokerage as you pay one fee for the entire order. Or you could fill 500 @ 3.02 and purchase the other 500 shares @ 3.03.

If you rang your broker and wished to sell @ 3.00 then your order could be filled straight away.

If there is both a bid & an offer in a security then there is someone willing to buy or sell those shares. The lack of a price means there is no-one willing to buy or sell. If there is no bid or offer in the shares you wish to trade then leave your broker a limit order i.e. I want to sell 1,000 shares @ $3.10. This offer will remain until it is filled or you cancel it (depending on your broker's order policy) If you are buying shares then brokerage will be added to the total amount payable. The rate of brokerage will depend on whom you use - most brokers will offer you a cheaper rate of brokerage if you open a Cash Management Account and have cleared funds in it before you buy shares. When you sell shares your brokerage will be subtracted from the sale proceeds.

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