What is the share market and how does it work?
Have you been thinking of getting into the share market however are unsure if it will be beneficial or don’t know where to start?
Like any investment there are certain levels of risks associated with shares. The below is a guide to the basics to help get you started. You should seek advice from a professional for a deeper understanding.
Understanding what the share market is
The share market is essentially an exchange where investors can buy and sell shares in a publicly listed companies and other listed securities such as exchange traded funds. A share market may also be referred to as a stock exchange.
There are multiple share markets across the globe with some better known ones being the New York Stock Exchange and the London Stock Exchange.
The national stock market in Australia is known as the Australian Stock Exchange. A relatively new exchange in Australia is Chi-X.
Traditionally brokers would take phone calls to buy and sell shares for the public at a specific location however with the introduction of the internet people can now do this online from anywhere.
What are shares?
A share is a portion of ownership that you may have in a particular company. There are a number of factors that determine the value of the particular share including how much money the company or asset returns. When you own a share you can sell them to another investor in the share market. You can also buy shares that you may want to invest in from other investors in the market.
What is a shareholder
When you buy shares, you become a shareholder. As a result you own a portion of that company.
Benefits of being a shareholder
There are a number of potential benefits of being a shareholder such as:
- The right to vote on company resolutions
- Attend annual general meetings
- Access to ongoing reports and information
- Potential for capital growth
- The company may pay you income through dividends
What is the difference between public and private companies?
Private companies are generally owned by a relatively small number of shareholders who may sell shares amongst themselves or to other close private parties. They cannot be listed on a stock exchange or raise funds publicly.
Public companies can be listed on a stock exchange. Companies often go public in an attempt to raise funds in order for the business to expand and scale up.
What is a share portfolio?
This is a combination of shares that you may own at a point in time. An individual is able to hold many shares in many companies across industries. The total collection of these shares is known as your portfolio.
Making money though shares
There are a number of ways to potentially make money through shares. This can be through:
If a company that you hold shares in makes a profit they may choose to distribute some of this to their shareholders. This will be paid in accordance to how many shares you own and can be franked, partially franked or unfranked. Some companies may also let you automatically reinvest these into additional shares in the company.
If the company has already paid tax on their profits then franking credits may be attached to your dividends. These credits can offset tax that you are due to pay on income received. If you hold your shares for over 12 months then you will may be eligible for a 50% reduction in your capital gains tax. You should seek your own independent advice on any tax benefits from share trading.
A capital gain occurs when the value of your shares increases. If you sell your shares after the value has increased, this locks in the profit and creates a realised capital gain. If you choose not to sell, this is called an unrealised capital gain, and the value of your shares can continue to increase or decrease.
This gives existing shareholders an opportunity to buy more shares at a discounted rate. This does not need to be bought through a broker meaning you could save on brokerage costs also.
Discounts and entitlements
Some companies may offer generous discounts to shareholders, particularly in retail, hospitality and entertainment industries.
What are the risks of shares and trading?
Some risks include:
Share prices can rise and fall quite quickly. This movement in prices is called volatility. Depending on the stock it may appreciate or depreciate by more than 50% in one year.
Not all sectors of the market follow the same cycles when it comes to the value of your shares. Some shares have a higher degree of risk when the overall share market has risen sharply and is set for a reaction. The opposite may apply when the market has gone into a strong decline and then starts to recover after showing some signs of stabilising.
Changes in current laws can impact shares in your portfolio, including the tax benefits on capital gains and dividends. These changes are hard to predict and could impact the effectiveness of your investment strategy.
You may not need to hold international shares for your portfolio to be effected by an event in a foreign market. Often large events that happen overseas have a direct effect on the Australian stock market also.
How to buy and sell shares
You can buy shares in one of two ways. Firstly, you can buy from the company itself when the shares are first offered as part of the public 'float'. Secondly, after the company has gone public, you can buy shares from other investors via the share market. Shares can only be sold on the secondary market.
Who can help in buying shares
- A non-advisory broking service (generally, an online broker, such as St.George Directshares). This option allows you to buy and sell.
- A full service broker
- A financial advisr or planner
It is important to remember that share trading may not be easy and the appropriate research, including obtaining quality advice, should be undertaken before you decide to implement your investment strategy.
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