Investing in Shares
The Business section in WA Today provides a simple explanation of what is a share and some ideas on what to look out for.
What you’ll learn in this step: Investing in shares was once just for the wealthy, but not any more.
Research by the Australian Stock Exchange shows that share ownership is increasing across the board, among all age groups, incomes and education levels.
These days, 55 per cent of adult Australians – 8 million people –own shares, either directly or through managed funds and superannuation. That’s one of the highest levels of share ownership in the world.
There are several advantages to investing in shares, also known as equities.
Historically, shares have provided some of the strongest after-tax investment returns over longer-term periods.
For example, in the 10 years to the end of 2004, Australian shares returned 9.2 per cent for an individual on the top marginal tax rate – the best result of the common forms of investment in the ASX survey and ahead of residential investment property on 8.4 per cent.
That after-tax performance is lifted by dividend imputation, a tax benefit not shared by other types of investment. If a company has already paid tax on its profits, investors receive a tax credit up to the corporate rate when the company distributes those profits to shareholders. (There may be a gap to meet if your personal tax rate is higher. And some companies don’t pay the full tax rate, in which case your dividend payments are only partly franked.)
Another advantage is that shares are much more ‘liquid’ than assets such as property. In other words, you can usually quickly and readily turn your shares into cash.
There’s a huge range of shares from which to choose. You should be able to find something that suits your pocket and your investment profile among the more than 2000 companies listed on the ASX.
What are shares?
Shares are just that – a share of, or stake in, a company. When you buy shares, you become a partial owner along with the other shareholders. You earn the right to have a say in how the company is run (by asking questions and voting at annual meetings) and to a share of its profits (in the form of dividends).
Companies issue shares to the public for a number of reasons, one of the main ones being to raise money to fund business growth. Or a private company might go ‘public’ when its proprietor decides to step back.
Companies in which you can buy and sell shares are called listed companies and are found on the Australian Stock Exchange and other exchanges worldwide.
Investors trade their shares via stockbrokers, either over the phone or via the internet.
The most common form of share is an ‘ordinary’ share. You can also buy preference shares, options, warrants and partly paid shares.
Shares are grouped in indices on stock exchanges, by size and by sector.
The S&P/ASX 50, for example, groups the 50 biggest stocks by market capitalisation (calculated by multiplying the number of shares on issue by the share price), while the Utilities sector index, for instance, covers electricity, gas and water companies.
In Australia, fund managers generally consider the S&P/ASX 200 – representing the 200 biggest stocks – to be the market benchmark. The former benchmark, the All Ordinaries Index, is made up of the largest 500 companies.
Such indices provide a picture of what is happening in the broader market as well as in particular sectors. They also allow comparisons to be made:
How is a particular electricity stock performing in comparison with the utilities index generally?
How is it going in relation to the overall market?
Is it ‘outperforming’ those indices?
Is it cheap or expensive compared with similar stocks?
When considering investing in shares, ask yourself:
What is my time frame for investment?
What sort of return do I want to achieve?
What level of risk am I prepared to take?
Will I actively trade shares or take a long-term buy-and-hold approach?
Do I want income from dividends or capital growth in the value of my shares?