What you'll learn in this step: Obtain definitions of the many types
of shares around and learn how to read newspaper tables. Find out more in this
step.
Investing in shares has many benefits including a high level of liquidity which
unlike property, gives you ready access to your money. There are more than 1200
companies on the stockmarket in which you can buy shares so there are plenty
to choose from to match your investment needs.
Buying shares in a company provide you with a “share” of it, making you a partial
owner along with the other shareholders. Companies issue shares to the public
for a number of reasons such as to raise money to fund growth or a takeover.
Around 40 per cent of Australians are now shareholders, largely through the
listings of companies such as the Commonwealth Bank and Telstra. By becoming
a shareholder, you have the right to a say in how the company is being run by
asking questions at annual meetings, and a share in its profits.
Companies in which you can buy and sell shares are called listed companies
and they can be found on the Australian Stock Exchange. You trade in shares
on the stock exchange via a stockbroker. You can either call your stockbroker
with an order or trade through them over the Internet.
If a company is listing for the first time – known as floating - you can apply
to buy shares by completing the application form in the company’s prospectus.
(see What is an IPO?). These new shares are offered to the public at a set price.
After the company lists, you can only trade the shares through a broker.
Learn
more: Making sense of the jargon, Ron Marney, The Age, 24 April 2003
If the jargon is a barrier to investing, maybe it is time to clear a few things up, writes Gabrielle Costa.
Making money from shares
The most common form of shares is ordinary shares. You can also buy preference
shares, options and partly paid shares.
There are a number of different types of shares such as ordinary or preference
shares which have different properties. For more experienced investors, derivatives
such as options and warrants provide further diversification. However, when
the majority of investors invest in shares, they buy ordinary shares.
We invest in shares to make money – either through a share’s capital growth,
i.e. the amount by which the share price increases in value over time, or through
the dividends it pays to its shareholders. Dividends are payments made by companies
to shareholders from their profits. Not all companies pay dividends. Dividends
are usually paid twice a year and are in effect the yield from your investment.
Some growth companies plough most of their profits back into generating more
business rather than paying out dividends to investors.
calculated and what does it say about the company? Ron Marney explains.
Learn
more: Fools and their shares, The Sydney Morning Herald, 11 Dec 2002 Barbara Drury lists 10 of the dumbest things you can do with your shares.
What is an IPO?
The first time a company lists, it is undergoing an IPO or Initial Public Offering.
They are also called floats in Australia. In recent years, there have been many
major floats including Telstra, the Commonwealth Bank and Qantas and this has
increased the number of Australians who have become shareholders.
If a company wants to offer shares to the public, it needs to issue a prospectus.
You can only apply for the shares through the application form in the prospectus,
which you send off with your cheque to the broker organising the float. A financial
benefit of buying shares through IPOs is that you do not pay any stamp duty
or brokerage fees. You also apply for the shares at a fixed price. If a listing
is expected to be popular, you may not receive all or even any of the shares
you wanted and you will be sent a refund.
Not all floats are a success. It's vital that you read the prospectus carefully
and you understand the company and its business. You should use the same investment
criteria as you would if you were buying shares of already listed companies.
Some smaller or highly prized floats are only available if you are a client
of a full-service broker who receives an allocation although some discount brokers
also have allocations. (See full service brokers).
The Australian Stock Exchange is a marketplace and like all marketplaces, the
price at which the shares trade are determined by supply and demand. If there
are more buyers than sellers, then the price will rise and if there are more
sellers than buyers it will fall. In turn that supply and demand is determined
by a number of other factors including:
General market sentiment
Movements on international markets, particularly Wall St, as was evidenced
by the September 11 attacks
Economic events
Company news
Interest rates
Speculation and rumour
What are indexes?
There are a number of indices on the Australian market that are calculated
by Standard and Poor's. The indices comprise a list of the securities are broadly
known as the ASX S&P 50, 100, 200 and 300. Each index represents the number
of stocks included on it. For example, the S&P 50 includes the top 50 companies
traded on the stock exchange.
The market benchmark for how the Australian equity market has performed is
the ASX 200. It used to be the All Ordinaries Index.
Checking up on your shares
Once you become a part owner in a company through buying shares, you will want
to keep tabs on how your shares are performing. You can do this either on the
internet where there are a number of sites that offer delayed – usually 20 minutes
- share prices. Or you can check the previous day’s close in the financial pages
of daily newspapers. The newspapers can generally also provide you with the
highest and lowest sale price of the day, the 52-week high and low, PE ratios,
and dividend yields.
What you'll learn in this step: Find out the difference between a discount
broker and a full-service broker. Read the handy tips on what to ask your broker
before you make any commitment.
What is a stockbroker?
A stockbroker is person who is licensed to trade in shares. They also have
direct access to the sharemarket and can act as your agent in share transactions.
For this service they charge a fee. Stockbrokers can also offer additional services
such as:
advice on shares, debentures, government bonds and listed property trusts
investment advice on a wide range of non-listed investment options (cash
management trusts, property and equity trusts)
planning, implementing and monitoring of your investment portfolio
research on national and international trends to help maximise your returns and
minimise risk.
What kind of stockbroker do I want?
There are two types of stockbroker - a full service broker (advisory) and a
discount broker (non-advisory).
A full-service broker will provide you with advice on which stocks to trade.
They can often operate as financial planners and help with other aspects of
your investment portfolio. Because they offer advice, a full service broker
usually charge more than discount brokers. Go to Moneymanger's online brokers fees and services comparison to get a general idea on the charges.
A discount broker will execute your trades but will not provide you with any
advice. As a result brokerage charges are low. In many cases less than $20 for
each transaction depending on the number of shares or amount you are buying.
Discount brokers generally operate via the telephone, Internet or both. Examples
of discount brokers include: E*Trade, Charles Schwab Australia and Commonwealth
Securities.
Normally brokers only handle minimum amounts, such as $1000. Shares are also
bought and sold in marketable parcels. For example, while you can place an order
for 1000 shares, it is unlikely you will be able to trade 1050.
The type of broker you choose will depend on your own confidence in trading
shares. Often investors who know exactly what they want to buy, will go to a
discount broker to enact the trade but they will use a full-service one if they
are interested in shares of a company they are unsure about.
Learn
more: Whose side are they
on?, Michelle Innis, The Sydney Morning Herald, 28 Nov 2001
Industry bodies have released a new policy to try to ensure that brokers and
analysts are working in your interest, reports Michelle Innis.
Where do I find a broker?
Choosing a stockbroker is just as important as choosing any professional that
acts on your behalf. There are a number of places you can go to when researching
the most appropriate one for you. Following up recommendations from friends
is very common as is choosing one that has a good reputation in the market.
The Australian Stock Exchange has a Broker Referral Service (www.asx.com.au)
that provides a list of brokers, both full service and discount.
Unless you are dealing with an Internet broker, it makes sense to choose one
who is based close to you. There's no point having a broker in Perth when you
live in Sydney - the phone costs wouldn’t justify it and there is a time difference.
When choosing a broker make sure you shop around and understand just what service
your broker will provide.
What you'll learn in this step: Flex your trading muscle by learning
the many aspects of share trading and how to keep track your investments.
If you are interested in learning about how to trade shares there are many
courses offered by a large number of organisations. Banks, building societies
and stockbrokers hold regular seminars in an attempt to get your business for
when you start trading.
One of the most popular avenues – although usually only accessible for city
dwellers – is the Australian Stock Exchange which conducts regular educational
seminars and courses on this topic. The ASX also promotes a online bookshop with Dymocks where you can order a large selection of investment books online.
Opening a trading account
Often brokers will insist that you open a trading account in order to trade
with them. This is usually a cash management trust that has sufficient funds
in it for you to conduct trades. When you buy shares, the cost of the shares
plus your transaction (brokerage) fee and stamp duty will be deducted automatically.
Share trades in Australia operate under a T+3 system. This means from the day
you buy or sell your shares you have three business days to settle your trade.
Share traders previously had five business days in which to settle but that
was when we were more reliant on cheques. Brokers favour electronic settlement,
which is why in many cases you have to set up a trading account.
Broker sponsored
Broker sponsored means the broker with whom you are dealing provides you with
a Holder Identification Number (HIN) for all the stocks you hold. Then when
you want to sell shares, you just give the directive and it can be executed.
Most brokers prefer you to be sponsored just by them. However, it is possible
to be sponsored by a number of brokers although if you are selling shares controlled
by another broker, you will have to provide the selling broker with a signed
CHESS sponsorship form and wait for the shares to be transferred. In addition,
having more than one sponsoring broker can make the monitoring of your share
portfolio more complex. Take for instance changing address - with only one sponsoring
broker you just make that single contact; with several you have to advise each
one.
What's CHESS?
CHESS stands for Clearing House Electronic Sub-register System. Its introduction
in 1994 means that you no longer have to hold share scrip (documentation) to
prove ownership of your shareholding. Instead your ownership is electronically
registered either with your stockbroker or with the company. If you sell your
shares, your holding is electronically transferred from your broker to the buyer's
broker. You can either be broker sponsored or issuer sponsored. But you need
to be sponsored in order to trade.
Issuer sponsored
Another acronym you may have heard of is SRN – Shareholder Registration Number
which identifies your registration on an Issuer Sponsored Subregister. An SRN
registers your shareholding in a single listed company. If you choose to be
Issuer Sponsored you will need a separate SRN for each shareholding.
Selecting shares
The decision about which shares to invest in ultimately comes down to you so
make sure you research any company you’re interested in. During the recent tech
boom, many people invested in technology stocks merely because everyone else
was and history has shown what happened to this sector. While it doesn’t hurt
to listen to people’s recommendations, make sure your decision to invest is
based on sound reasons. You should look at previous annual reports, talk with
your broker, read the financial press and check out ASX announcements.
There are two approaches with buying and selling shares that stockbrokers adopt.
These are fundamental analysis and technical analysis.
Fundamental analysis considers factors such as the economy and the company’s
balance sheet and outlook. Technical analysis identifies patterns relating to
a company’s share price. Particular patterns suggest the likely behaviour of
a share price and decisions to invest are based on these expectations.
Learn
more: How to value shares,
Annette Sampson, The Sydney Morning Herald, 28 Nov 2001
The strategy: To understand discounted cash flow.
Learn
more: Trading technical secrets, Personal Investor, December 2002
Your starting point for an education in technical analysis should be a thorough understanding of the two key tenets of charting.
Employee share scheme
Before you decide to participate, it is important to understand how they work as they can carry unexpected income tax and capital gains tax (CGT) implications. One is a salary-sacrifice arrangement that allows employees to buy the shares at market value. The other allows employees to buy them from after-tax salary but at a discount to the market price. Check woth your employee to see if they offer such a scheme.
Learn
more: Sharing the load, The Sydney Morning Herald, 16 April 2003
Before you participate in an employee share scheme, make sure you understand its tax implications, reports Leeanne Bland.
Buying shares
When you put in an order to buy shares, your broker will place your order on
the market. If your broker has direct-through trading this should happen fairly
promptly although with some brokers it can take up to half an hour. Orders are
queued and traded depending on price and time - the better-priced bids will
have priority. If there are several bids at the one price, then the one placed
first will have priority. When placing your order you can choose to buy at a
specific price - 'at limit' or 'at market'. At market is what it says - the
price current at the time of your transaction. You can also put a time limit
on your order so that it is cancelled if it is not executed within the given
time. Most brokers will put a limit on the number of days an order can stand.
Brokers talk in numbers of shares not dollars. If you only want to spend $10,000
work out the approximate number of shares otherwise you might find yourself
buying 10,000 BHP shares for instance - and that' will cost you around $100,000!
Brokers
talk in numbers of shares not dollars. If you only want to spend $10,000 work
out the approximate number of shares otherwise you might find yourself buying
10,000 BHP shares for instance - and that's some $200,000!
Stock Exchange Automated Trading System
SEATS stands for Stock Exchange Automated Trading System. All share transactions
are now carried out electronically and SEATS is the system in which your broker
will relay your buy or sell order. Only brokers have access to SEATS. Your order
will join a queue of other buyers and sellers until the transaction is completed.
If you are trading online, your order is sent to your broker’s office and entered
into SEATS.
While you can call your broker any time with an order, the market only trades
from Monday to Friday and from 10am – 4pm.
Selling shares
When you plan to sell shares you need to advise your broker of your ownership
of the stock. If you are dealing with your sponsoring broker, they will already
have the confirmation to hand. You can then request that your broker sell shares
either at a particular price or at market. If you have bought the shares in
a float you may need to transfer CHESS registration to your broker.
Make
sure you store safely any CHESS documentation you receive when you buy or sell
shares.
Tracking your investments
While many people talk about buying shares and putting them in the bottom drawer,
it is a better strategy to regularly monitor them to keep track of how your
assets are performing. Investing for the long term should not mean clinging
on to shares that are never going to recover the value you paid for them. If
your shares are under-performing, you may need to make some hard decisions about
what to do with them.
What you'll learn in this step: Spreading your investments over a variety
of industries is one method to employ when planning your buying strategy.
Building a share portfolio
Because a large number of investors received shares through being members of
companies that listed, such as AMP and NRMA, in many cases this means investors
aren’t diversified enough. Most market watchers believe a portfolio of 10 companies
is enough to give you adequate diversification without monitoring them being
too big a task.
Ideally you should spread your investments among a variety of industries although
you might choose to have two companies in the same industry if their business
is sufficiently different to give you diversification.
It is an advantage to invest in companies that you know something about as you
will have a more comprehensive knowledge of what factors are affecting the industry.
Learn
more: Go forth and diversify to beat blues
, The Sun Herald, 09 Feb 2003
Reckon you'd be crazy to go out and buy shares right now? Well, think again. Business editor David Potts shows how to turn these gloomy times to your advantage.
When to buy. When to sell.
Knowing when to buy and sell shares is the million dollar question. If you
are investing for the long-term the right time to buy is now. Of course if the
shares were to drop 20 per cent tomorrow, you would be sorry you had not waited
a day, but many an investor has missed out on good opportunities by trying to
pick the market.
Don’t
try and be a bottom picker. If you continue to wait before investing in the
sharemarket, you will never invest and consequently miss many opportunities.
Dollar cost averaging
Dollar cost averaging is a technique that helps you iron out the swings in
the market. If you buy $1000 worth of shares in a company every month for a
year you would find that some months you got more shares than others. That is,
when the price was high you bought fewer shares, and when the price was low
you bought more. If you averaged out what you paid for each share during the
course of the year, the fluctuations should have largely been ironed out.
Dummy portfolios (watchlists)
If you're hesitant about which shares should make up your portfolio, why don't
you monitor a dummy portfolio for six months and see how you go? Meanwhile you
can be accumulating funds to invest as well as learning about how to invest.
Create a shares watchlist on
Moneymanager and monitor the performance of the shares you’re interested in
over a set period such as six months.
Share clubs
Joining a share investment club can be a good way to learn about the sharemarket
and hopefully make money at the same time. Share clubs have been springing up
around the country and involve a group of friends or acquaintances who get together
to discuss share investing with the aim of investing in a number of shares.
Each member contributes money and carries out research on stocks. The downside
is that sometimes you may not be in agreement about what stocks to invest in
so consider this option carefully.
Borrowing to invest
Using the equity in your home as leverage to invest in the sharemarket is becoming
a popular strategy. However, the bottom line is that you are borrowing the money-
a practice called gearing. If the value of your investment falls you will still
have to pay back your loan and you may also be up for a margin call from the
company you borrowed the money from.
Learn
more: Have house, will borrow, Personal Investor, February 2003
Home equity loans a great way (for some) to boost investment returns
Margin lending
A margin loan is a special type of interest-bearing loan secured by shares. Such loans are available from banks, but they are also marketed by organisations associated with some stockbrokers. A minimum loan size is usually imposed.
Whether such a loan is suitable for you depends on your circumstances. Margin loans are usually marketed on the basis that they will enable you to acquire a much bigger portfolio of shares than if you used only your own money. If the shares go up, then you will make a much bigger profit. Quite true - but this is only part of the story. If the shares go down, you will also make a much bigger loss. Leverage is always a two-edged sword so you might be in for a margin call.
A margin call is a formal demand for some remedial action by you. This can take the form of "topping up" your portfolio with shares or cash or, conversely, selling some of the shares. If it drops so that the amount of cover falls below a defined ratio, then the lender makes a margin call. For example, if the original maximum loan was 70 per cent of the value of a parcel of shares, a call might be made if the "loan to value" ratio goes over, say, 75 per cent.
Learn
more: Other people's money, Personal Investor, April 2003
Australians are embracing margin lending to increase their wealth like never before - but what is it?
Learn
more: Mind the gap, The Sydney Morning Herald, 05 March 2003
Investors on margin loans need strategies - and nerves of steel - in a falling market, reports Michelle Innis.
International shares
The Australian sharemarket only comprises 2 per cent of the global sharemarket
so you should have exposure to overseas markets if you want to be where the
action is. While there are a number of brokers such as TD Waterhouse and the
Commonwealth Bank through which you can buy international shares, the easiest
way to invest in overseas shares is through managed funds.
Speculative investments
Speculative investments should only be made with money you don't mind losing
and should never amount to more than about 10 per cent of your total portfolio.
The recent rout of technology stocks should be a lesson to all investors who
invested blindly in speculative stocks.
Traders and investors
Some people choose to be traders rather than investors. Traders only hold stock
for a short period of time, trading in and out of the market while trying to
capture profits. Being a trader requires a lot of time, energy, understanding
and research and usually people give up their day job to trade full-time.
What you'll learn in this step: As taxation applies to all investments,
it helps to be aware of elements such as capital gains tax and franking credits.
The money we make from shares usually comes in the form of dividends or capital
growth. The dividends you receive need to be included in your annual tax return
as does the capital gain or loss you may have incurred upon selling shares.
Dividends and franking credits
In 1987 dividend imputation was introduced. Before that date companies would
pay tax on their income, then pay your dividend from their net profit. You would
then have to pay tax on your dividend. In effect, the Tax Office was taxing
the money twice. Franking means that if the company in which you have invested
has paid tax at the full corporate rate of 30 per cent, you in turn will get
a tax credit on your dividends for the tax the company has already paid.
Some companies don't pay the full tax rate in which case your dividend payments
are only partly franked.
Franking credits on your dividends can make shares a very attractive investment
option.
When filling in your tax return, don’t forget to claim any of your imputation
(franking) credits. You can find out this amount from the dividend statements
that you receive. If you do not normally lodge a tax return, you can claim a
refund on these credits from the Tax Office.
Some companies offer dividend reinvestment plans where your dividend is automatically
used to purchase shares in the company. Some people view this as a form of enforced
saving. Even though you haven’t received the dividend in your hand, you must
still include the amount in your tax return.
Learn
more: Hang on for your fair
share, Ron Marney, The Age, 25 June 2001
Shareholders love to receive their dividend cheques, but how is that dividend
calculated and what does it say about the company? Ron Marney explains.
Capital gains tax
The slashing in half of capital gains tax has made growth shares an attractive
proposition. If you hold onto shares for more than 12 months before you sell
them and you are on the top marginal tax rate, your capital gains tax rate has
dropped effectively from 48.5 per cent to 24.25 per cent.
When you are filing your tax return, you must include details on any capital
gains or losses. Remember capital losses can only be offset against capital
gains. Remember to keep all your documents. You need to have comprehensive records
in order to calculate what you owe.
Step 1:
Step 2:
Learn
more: 
Each week financial advisor Noel Whittaker answers your
questions.
