Shares, also known as stocks or equities, are popular among Australians.
As an investment, shares have lower and fewer upfront costs compared to, say, property. There are no ongoing costs, and, depending on the share you choose to invest in, shareholders can earn regular, income through dividends as well as enjoying the potential for long-term capital growth.
Having said that, it’s important to understand that share prices rise and fall and the payment of dividends and the return of capital are not guaranteed.
When you buy shares listed on the Australian Securities Exchange (ASX), you are buying a slice of a public company. As a part-owner, you may be entitled to a stake in the company’s profits. This is paid out to shareholders as “dividends”.
As the company’s business grows over time, the value of the shares may grow, and this can provide capital growth for shareholders.
With thousands of companies listed on the ASX, there is a wide variety of companies and industries you can invest in through shares. Some, like the big banks, major mining companies, and big retailers are long-established businesses and may be more likely than others to pay regular dividends.
If franked dividends are distributed, the investor is entitled to a tax offset which is a credit for the company tax paid. The investor is required to add the franking credit to the dividend received to work out taxable income. Investors then may be able to claim a tax offset equal to the franking credit. Any excess offset may be refunded if their personal tax rate is below the company tax rate.
Investors can choose to own shares directly, and online broking has made share ownership more accessible. Investors open an account, select their shares and place an order online. It can be a relatively quick and inexpensive way to invest directly in shares.
The hardest part is knowing which shares to buy (and sell), and when to do it. It usually makes sense to build a diverse share portfolio with exposure to a number of different companies and sectors. However different investors will have different goals. For example, investors who need, say, regular income may want to focus on companies that pay regular dividends.
Remember, as a shareholder, you are becoming a part-owner of that business, so it pays to understand that business. Look at the market the company operates in, how its product or service is likely to succeed, the quality of management of the company and the overall economic conditions that could impact the company’s business.
The ASX offers thousands of shares to choose from but it represents just a fraction of the world’s listed companies.
For further diversity, an investor may consider investing in international share markets. This provides an opportunity to invest in some of the world’s largest companies like, say, Apple Inc. or Google, and it also means being able to access industries that are not represented on the ASX. Bear in mind though that investing internationally comes with its own set of risks, including currency risk, which need to be managed.
As an investor, you can choose to own international shares directly by investing through an online broker offering access to global sharemarkets. Or you can invest indirectly through a managed investment.
If you aren’t sure which shares to add to your portfolio, there are pre-packaged portfolios of shares available where you pick the type of portfolio that suits your investment goals, and investment experts will do the rest, managing the portfolio on your behalf.
These managed investment options can make sense if you have limited funds to invest. They can be a low cost way to invest in shares with the benefit of professional investment management.