If you’ve never invested in the share market it can seem overwhelming.

You may be hesitant to part with your money but if you follow sound financial advice on how to invest in Australian bank shares, it can be very lucrative.

What is a share and how can I buy one?

In the most simple terms, a share is a single unit of ownership in a company, for example Commonwealth Bank has 2,150,844 shares listed on the ASX (Australian Stock Exchange). The ASX is an exchange that offers listing, trading, clearing, settlement, technical and information services, technology, data and other post-trade services. Effectively it acts as a market operator, clearing house and payments system facilitator and is responsible for ensuring compliance with its operating rules. It helps to educate and inform retail investors.

To buy a share you need to use a third party, referred to as a broker to facilitate the buying or selling of the shares. The minimum amount of shares you can buy is $500.

You can either buy the shares at the current market rate or set a limit order. A market order is where you will make the trade immediately whereas a limit order is where you buy shares at a specific price or better. If the share never reaches your desired price then the trade will never be executed.

After buying shares in a company, such as Commonwealth Bank or ANZ, you then own a small portion of the business.

Why should I invest in the share market?

Financial experts and advisors often tell would-be investors that they should diversify their investments because it spreads the risk. When you invest in the Australian stock market you can get an average return of 9.4% per annum making it a more solid investment than a term deposit or other savings account which is currently lower than 1%.

If you can stomach the risk and want to achieve higher returns than a bank savings, then investing in the Australian share market is your best option.

Won’t my money be safer in a savings account?

Although it is true that savings accounts and term deposit accounts are safer than the share market, they also do not provide the same opportunity to build your wealth that the share market does. Based on current interest rates, if you left your money in a savings account you would actually make a loss because of inflation, which sat at 3.5% in 2021.

How do I make money from shares?

There are two ways to make money from shares.

Capital gains

Firstly you can make money through the share price increasing, which is also known as a capital gain meaning that you sell them for more than what you paid for them. Not all shares will increase in value, with some actually decreasing in value, leading to a loss.

A share in the company’s profits

Company profits are normally known as dividends and they are generally paid out to shareholders once or twice a year. There is no legal requirement for businesses to pay dividends but many do so they can return earnings to their shareholders.

What Australian banks can I invest in?

When you think about banks that are listed on the ASX you probably immediately think of “the big four” which are Commonwealth Bank (ASX:CBA), National Australia Bank (ASX:NAB), ANZ Banking Group Limited (ASX:ANZ) and Westpac Banking Corp (ASX:WBC).

In reality the list of banks listed on the ASX is quite comprehensive, with 22 banks of varying sizes listed.

Which bank should I invest in?

You should start your investment journey by conducting research. When you’re researching the Australian banks you should look at their past financial performance. How they have performed in the past provides an indication of how secure your investment is likely to be. You should also ask other questions such as:

  • Is this a bank of the future?
  • Does the bank have the potential to grow?
  • Which companies are the bank’s main competitors?

Before you make a final decision it is worth reviewing the bank’s annual report and their yearly and half yearly financial results statements. You should also look at their price performance on the sharemarket and their market cap.

What is market cap?

The market cap is the market capitalisation of a business, meaning the total market value of a company’s shares on the market. Often the term is shortened to “market cap” and is an easy way for investors to work out what a company’s size is, which can provide an indication of the risk associated with investing in the business.

Market cap is broken up into three different categories:

  • Large market: A business worth $10 billion or more.
  • Mid cap: A business worth between $3 billion and $10 billion.
  • Low cap: A business that is worth less than $3 billion.

It can generally be assumed that a higher market cap means that the business is likely to have good stability.

What dividends can I expect?

You can expect to receive dividend payments from the big four Australian banks twice a year. The dividends are based on the company’s profit margins and are paid per share owned. For example if you own 50 shares in an Australian bank and the dividend payment is 50 cents per share you will receive a dividend of $25.00 for your investment

The big four Australian banks have a typical yield of 2-7% which is reasonable.

Investing in shares with a high yield is more risky because it signifies a volatile market and high dividend payouts may be unsustainable in the long term. One good dividend payment does not always guarantee the future performance of the stock and as with all financial products you should always read the product disclosure statement (PDS) before investing.

Final takeaways

Before you invest in any of the Australian banks, you need to research the market and decide what your investment goals are. You also need to be aware that bank share prices can bounce around and dividends are not guaranteed.

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