BEGINNERS GUIDE TO SHARE INVESTING

Thinking of investing in shares but not sure where to start?

Investing in shares can be a smart way to make your money work harder.

It's important to understand the risks and get advice from the right people, but if you're ready to start investing, there are some key things you need to know about the share market, how to buy and sell shares, and what it means to be a shareholder.

The more you understand, the better and smarter you'll be at managing your money long term.

1. What is the share market?

The share market (also referred to as a stock exchange) is a transparent and regulated marketplace in which shares in public companies are bought and sold.

You could think of a share market as a department store for shares – or a ‘one-stop-shop’ for anyone who wants to buy or sell shares in any public company trading in that market. There are lots of different share markets, all over the world. Some of the most well-known include the New York Stock Exchange and the London Stock Exchange.

Here in Australia, we have the Australian Securities Exchange (usually referred to as the ASX) and Cboe Australia. All Australian stockbrokers are required by law to provide buyers and sellers with access to both share markets.

In Australia, the share market has two main responsibilities:

• Operating what's referred to as a 'primary market', which allows companies to raise money by issuing shares for sale, and
• Operating a 'secondary market', in which investors can buy and then sell shares at prices that are determined by market forces.

2. What are shares?

A share is a portion of ownership (or ‘equity’) that you can have in a company. The value of your share depends on several factors – including the company’s earnings, its future growth potential, industry trends and economic climate.

Once you own shares in a particular company, you can sell them to other investors on the share market.

Here in Australia, there are thousands of public companies on the share market - across many industries. Choosing a combination of shares from different industries can help minimise your risk.

3. What's a shareholder?

When you buy shares, you become a shareholder. This means that you own a percentage of that company or asset, alongside other shareholders. There are benefits to being a shareholder, but also some risks and these are discussed below.

4. What are the benefits of being a shareholder?

Shareholders have the potential to profit from a rising share price and the potential to earn an income from the distribution of profits by the company. Shareholders also have a range of other rights and benefits.

As a shareholder, you have the right to vote on board resolutions and have a say in how the company or asset should be managed. You also have the right to attend the Annual General Meeting (AGM) of that company.

You will also receive ongoing reports and information regarding the progress of the company – to help you determine the ongoing value of your investment.

There may be other rights and responsibilities that come with being a shareholder, depending on the company or companies that you are investing in.

5. What's the difference between a public and a private shareholder?

Private companies are ones in which the ownership is tightly held between a small group of people who may sell the shares amongst themselves.

A public company is one where shares can be openly traded between members of the public. When companies 'go public' it means they are listed on a stock exchange, and that they have issued shares to investors (members of the public). To do so here in Australia, companies need to lodge a prospectus with the Australian Securities Investments Commission (ASIC). Companies usually go public in order to raise funds and expand their business.

6. What is a share portfolio?

This refers to the collection of shares that you own at any given time. You can own multiple shares in multiple companies and across several industries. Your total collection of shares is referred to as your share portfolio.

7. How can you make money through shares?

There are a few ways in which investing in shares can make you money. These include:

Capital growth

You can make money through shares if you sell your shares at a higher price than you paid for them.

An advantage of shares is that they can usually be bought and sold very easily, and very quickly. In most cases, you can usually sell shares and then access the cash in just a few days.

Unlike real estate property, there are no complicated legal processes and you can access your proceeds at settlement. Plus, unlike real estate property, you can always sell a portion of your share portfolio if you need extra money.

Dividends

If a company that you own shares in makes a profit, and the directors decide to do so, this profit (or a portion of it) may be divided amongst all shareholders as a dividend payment. This is paid according to the number of shares that you own.

Some companies also have dividend reinvestment plans in place, where additional shares are issued to shareholders (often at a slight discount and without brokerage fees) rather than paying out dividends in cash.

Tax benefits

If the company has already paid tax on their profits, tax credits known as ‘franking credits’ can be attached to the dividends that you receive. These franking credits can then be used to offset tax that you are due to pay on other income.

If you hold shares for over a year, you could also qualify for a 50 percent discount on any capital gains tax you incur when you sell those shares for a profit.

If you sell shares for a loss, you can potentially use those losses to reduce the amount of tax you need to pay on future capital gains.

Always seek your own independent advice on any tax benefits from share trading.

Rights issues

Some public companies make what are called 'rights issues'. These give existing shareholders the opportunity to buy more shares in the company at a discounted rate and without the need to buy through brokers, thereby saving on brokerage fees.

Companies do this as a way of raising more money to help them grow the business. If you are an existing shareholder, it means you can increase the number of shares you have in a company at a discounted price. Even if you decide not to take up their offer, you may be able to sell the right to buy the discounted shares to someone else.

Shareholder discounts or entitlements

Some public companies, usually in the retail, hospitality, entertainment or financial services industries, offer generous discounts to shareholders when they buy goods or services from the companies or their subsidiaries. Typically, you need to hold a qualifying number of shares to be eligible.

8. What are the risks of investing in shares?

Along with the many benefits, there are also some risks associated with share investing. These include:

Volatility risk

As share prices can rise and fall rapidly, you need to accept that the value of your shares may fluctuate in a year.

Timing risk

Not all sectors of the market follow the same cycles when it comes to the value of shares. Some shares have a higher degree of risk when the overall share market has risen sharply and is set for a correction. Alternatively the market may go into a strong decline and then start to recover. It's important to always do your research and obtain your own independent expert advice in areas where you've still got questions.

Legislative risk

Your investment strategies or your individual investments could be affected by changes to current law, including in relation to any tax benefits you may enjoy as a shareholder.

Currency risk

If you have overseas investments, you need to think about how adverse movements in currency may affect the value of your shares. This is because, for any profits generated, when you bring them home, they need to be converted from the foreign currency into Australian dollars.

9. How do you buy and sell shares?

You can buy shares in one of two ways:

• You can buy from the company itself when the shares are first offered as part of the public 'float', or
• After the company has gone public, you can buy shares from other investors via the secondary market (i.e. via the ASX or Chi-X).

Shares can only be sold on the secondary market.

10. Who can help you buy and sell shares?

There are three channels through which you can buy and sell shares. These are:

• A non-advisory broking service (generally, an online broker such as Westpac Share Trading).
• An advisory broking service (also called a 'full service' broker).
• A financial planner.

Regardless of the method you choose, or the number of shares you want to buy, it's important to remember that share trading can be complex. However, a little understanding and the right advice could make a big difference, especially when it comes to how you manage the risks.