How to invest in Australia stocks: ASX share access options abound
Australian equities offer investors exposure to some of the most unique mining companies in the world. The nation’s vast mineral and energy resources also make its equity markets a proxy play to global commodity cycles.
For foreign investors, Australian equity markets may give them an opportunity to diversify beyond their respective native stock markets in periods of domestic economic downturns.
In this article, we talk about how to invest in Australian stocks. You will also find information on historic Australian stock market returns and the use of contracts for different (CFDs) for trading in Australian equities.
How to start investing in Australia’s markets
One of the ways to start your investment journey is by learning the basics of the Australian stock market. Let’s begin with the Australian equity benchmark S&P/ASX 200 (AU200) Index.
The S&P/ASX 200 tracks the performance of the 200 largest companies listed on the Australian Securities Exchange (ASX). The index is recognised as the institutional investable benchmark in Australia.
As of 30 September 2022, the financial and materials sector dominated the S&P/ASX 200 index with an aggregate sector weighting of over 50% on the index.
Foreign investors have, historically, been attracted to Australian stock markets for their large share of mining companies that produce industrial and precious metals, like iron ore, copper, lithium and gold. Australia’s ‘Big Four’ banks are also noted for their dividend yields.
Global mining company BHP Group (BHP) was the largest constituent of S&P/ASX 200, followed by lender Commonwealth Bank Australia (CBA) and healthcare firm CSL (CSL).
What about the Australian economy? The continent’s rich natural resources have attracted major mining and energy companies to set up operations in the country. Naturally, Australia is an export-focused nation, with commodities like iron ore, coal, liquified natural gas and gold among its top exports.
Australian stock market performance
Equity markets in Australia have mirrored the global weakness in risk-on investment sentiment in 2022 following the start of a monetary tightening cycle across the world. As of 7 October, Australia's benchmark equity index S&P/ASX 200 (AU200) has lost over 10% year-to-date (YTD).
Past performance is not a reliable indicator of future results
In comparison, US benchmark index S&P 500 (US500) has slumped over 20% YTD, while blue-chip UK equity index FTSE 100 (UK100) has fallen about 6% and Hong Kong’s Hang Seng (HK50) has declined over 24%, as of 7 October.
The Australian index fell to a one-and-a-half year low of 6,407 points in June after the US Federal Reserve (Fed) hiked interest rates by 75 basis points (bps) for the first time in nearly 30 years. The S&P/ASX 200 index tested its June low in early October, falling to 6,411 points on 3 October 2022.
Since then the index has rebounded on investors' hopes of an easing in monetary tightening going forward. The S&P/ASX 200 index’s record high stands at the 7,632 points hit in August 2021.
According to index provider S&P Global, the S&P/ASX 200 index has posted annualised returns of about 6.7% in the last five years and 8.4% in the last 10 years on a total return basis, as of end-September 2022.
How to invest in Australian stocks: Stocks and ETFs
Investors can take a position in the AU stock market through stocks exchange-traded funds (ETFs). These instruments are typically used as part of buy-and-hold strategy aimed at long-term gains, although in some cases it can be used for short-term trading too.
-
Stocks
How to buy stocks in Australia? Investors based in Australia can buy stocks directly through their online brokerage accounts. Buying shares in Australia is facilitated by the ASX.
Foreign investors can also invest in stocks in Australia provided that their brokerage has listed Australian equities on their platform.
-
Index funds and ETFs
Investors can get broad exposure to the Australian stock market by investing in an index fund which tracks the benchmark S&P/ASX 200 index. Investing in ASX 200 index will give you exposure to the top 200 publicly-listed companies in Australia.
Market participants also have the option of investing in specific sectors. For example, investors can buy an ETF that tracks the performance of the S&P/ASX 300 Metal & Mining Index to keep their exposure to the top mining companies listed in Australia.
How to trade Australian shares using CFDs
Traders interested in short-term gains have various derivatives available to them for stock market trading. CFDs, for example, offer clients to speculate on the prices of securities without owning the underlying asset. A CFD is a contract between a broker and a trader to exchange the difference in value of an underlying asset between the beginning and the end of the contract.
A CFD is a leveraged financial product. This means that CFDs traders use margin accounts and need to put down only a fraction of the total capital required to open a leveraged position. The rest of the capital is lent to traders by their brokerage company.
The initial amount required to open a CFD position is known as margin deposit, which is a percentage of the trade’s total value. A trader will also need a minimum amount of capital in their account, known as maintenance margin, to keep a leveraged trade open.
They may be asked to deposit additional capital in their account to keep positions open, in case their trades start to make a loss. This is known as margin call. Note that CFDs use leverage, which magnifies both profits and losses and therefore there is a risk of higher loss.
Trade Australia 200 - AU200 CFD
Past performance is not a reliable indicator of future results
Why should you trade CFDs with Capital.com?
CFD trading offers a flexible alternative to traditional ways of buying and selling stocks. Traders can take advantage of CFD features to potentially capitalise on short-term price movements as they do not require holders to own the underlying asset.
It is very important to note that leverage products like CFDs can magnify both profits and losses. If the market goes against your position, you may incur losses greater than the amount initially invested.
One of the biggest advantages of CFD trading is that traders can gain greater exposure with their available capital through the use of margins. For example, Capital.com offers a 5% margin on S&P/ASX 200 (AU200), which is equivalent to the leverage ratio of 20:1. This means that a trader will need $50 in their account to open a AU200 position worth $1,000.
Another advantage of CFD trading is that because traders do not have to own the underlying stock it’s an easy tool for short selling. Traders can open a short position in available assets by simply selling a CFD and later closing the position according to their price targets and risk tolerance.
Traders should know that CFDs brokers typically charge additional fees such as overnight fees and guaranteed stop-loss fees, among others. Margin call is a key risk to CFD trading.
Note that CFD trading is highly speculative and involves the significant risk of loss. Traders have to consider their investment objectives and risk appetite before deciding to trade CFDs.
Key risks associated with Australian equities
There are several risks associated with Australian stock market investing. Firstly, it is important for investors to acknowledge the unpredictability of financial markets. Numerous forces can affect market performance.
It is important for investors to conduct their own research before investing in an ASX-listed stock or an ETF that tracks a group of Australia-listed companies.
In 2022, monetary policy risk has been the main theme of global financial markets. Australian equities have seen their valuations dropping following the start of a global monetary tightening cycle. Investors fear that aggressive interest rate hikes will sap away liquidity from financial systems, resulting in a period of low economic growth or recession.
Rising inflation, foreign exchange rate fluctuations, supply chain problems, geopolitical conflicts and recessions are key macroeconomic risks. Company-specific risks, such as poor earnings, management controversies, merger and acquisition (M&A), activist investors, delistings and bankruptcies, can affect stock market valuations. Plus, financial markets may also exhibit seasonal trends, suggesting it’s important to consider when to invest.
The bottom line
Note that while this article provides important information on how to buy Australian stocks it shouldn’t be used as a substitute for your own research.
You should first determine your risk tolerance, investing or trading strategy, and how much money you are willing to risk. Traders have many choices at hand, from stocks and ETFs aimed at a longer timeframe to derivatives such as CFDs that are more appropriate for short-term trading. It’s important to define your own strategy when researching how to buy shares in Australia.
Investors and traders are also encouraged to perform adequate due diligence on any security they wish to invest or trade in. Remember, past performance does not guarantee future returns. And never trade money you cannot afford to lose.