How does Share Trading Work
Here we breakdown share trading beyond simply buying and selling. Read below to understand the steps involved.
What to buy and what to sell?
Being well-informed is the first step to making positive investment decisions. As an investor, there are a range of useful tools that you can use to help guide such decisions. Although, if you do not have the resources or the time to equip yourself with a good understanding of the share market, you may be better off speaking with a financial planner.
On the share market, each security will generally have a range of prices for which buyers are prepared to buy shares at, known as ‘bids’. There are also a series of prices for which sellers are willing to sell their shares for, known as ‘offers’. When the price of a bid and an offer align, a trade will be executed.
Trade settlement occurs 2 trading days after trade execution. At this point, transfer of ownership is made between the buyer and the seller.
Types of Orders: ‘at market’ vs. ‘at limit’
An ‘at market order’ is a basic type of order to be executed at market value. Note, if the market price moves away from the order price, the order may not be completed in full.
An ‘at limit’ order is another basic order type, which allows the investor to set a ‘limit’ in regards to the price they will pay or accept. Whilst ‘at market’ prices are open to fluctuations, placing an ‘at limit’ order can help you be specific about your purchasing or sale price.
What is a contract note?
Once your trade is executed your broker will send you a contract note (commonly referred to as a confirmation), which will outline the details of the trade.
Buying new shares
If it is your first time purchasing a company’s shares, you will need to complete and return documents such as your bank details and tax file number. You will also be given a letter from the company’s share registry welcoming you.
Dividends will usually be paid into the bank account that you provided the company. The share registry will provide a statement notifying you of any payment. Often companies will have Dividend Reinvestment Plans (DRPs) which will allow you to use your dividends to purchase additional shares, often at a below market price.
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