Are you thinking of getting into the stock market but not sure if it will be profitable or don’t know where to start?
Like any investment there are some levels of risk associated with shares. Below is a guide to the basics to help you get started. You should consult a professional for a deeper understanding.
Understanding what is stock market
A stock market is essentially an exchange where investors can buy and sell shares in publicly listed companies and other listed securities such as exchange traded funds. A stock market can also be called a stock exchange.
There are many stock markets around the world with New York Stock Exchange and London Stock Exchange being some of the best known.
The national stock market in Australia is known as the Australian Stock Exchange. A relatively new exchange in Australia is Chi-X.
Traditionally brokers used to take phone calls for people to buy and sell shares from specific locations but with the introduction of internet people can now do this online from anywhere.
What are shares?
A share is a piece of ownership that you can have in a particular company. There are many factors that determine the value of a particular share, including how much money the company or asset returns. When you own a share, you can sell it to another investor in the stock market. You can also buy shares that you want to invest from other investors in the market.
What is a Shareholder?
When you buy shares, you become a shareholder. As a result you own a part of that company.
Benefits of being a shareholder
Being a shareholder has many potential benefits such as:
- Right to vote on company resolutions
- Attend Annual General Meetings
- Access to current 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 usually owned by a relatively small number of shareholders who can sell shares among themselves or to other closely held private parties. They cannot be listed on stock exchanges or raise funds publicly.
Public companies can be listed on stock exchanges. Companies often go public in an effort to raise funds to expand and expand the business.
What is a share portfolio?
It is a combination of shares that you may own. A person is able to hold shares in many companies in many industries. The total collection of these stocks is known as your portfolio.
Shares make money though
There are many ways to potentially make money through shares. This can be done by:
dividends
If the company in which you hold shares makes a profit, they may choose to distribute a portion of it to their shareholders. These payments will be made according to the number of shares you own and can be franked, partially franked or unfranked. Some companies allow you to automatically reinvest additional shares in the company.
tax benefits
Franking credits can be attached to your dividends if the company has already paid tax on their profits. These credits can offset the tax you owe on the income you receive. If you hold your shares for more than 12 months you will be eligible for a 50% reduction in your capital gains tax. You should seek your own independent advice regarding any tax benefits in share trading.
Capital increase
Capital gains occur when your shares appreciate in value. If you sell your shares after they have appreciated in value, this closes the gain and realizes a capital gain. If you decide not to sell, this is called an unrealized capital gain and the value of your shares may go up or down.
rights issue
This gives existing shareholders an opportunity to purchase more shares at a discounted rate. There is no need to buy it through a broker so you can save on brokerage costs as well.
Concessions and Entitlements
Some companies may offer generous discounts to shareholders, especially in the retail, hospitality and entertainment industries.
What are the risks of shares and trading?
Some of the risks include:
Price risk
Share prices can rise and fall quickly. This movement in price is called volatility. Depending on the stock it can rise or fall more than 50% in a year.
The danger of time
Not all market sectors follow the same cycles when it comes to the value of your shares. Certain stocks carry a high degree of risk when the overall stock market is bullish and set for a reaction. The opposite can be true when the market falls sharply and starts to recover after showing some signs of stabilization.
Legislative risk
Changes in current laws may affect the shares in your portfolio, including tax benefits on capital gains and dividends. These changes are difficult to predict and can affect the effectiveness of your investment strategy.
Danger abroad
You don’t need to hold international shares for your portfolio to be affected by events in foreign markets. Often major events overseas also have a direct impact on the Australian stock market.
How to buy and sell shares
You can buy shares in one of two ways. Firstly, you can buy shares from the company itself when it is first offered as part of a public ‘float’. Secondly, after the company goes public, you can buy shares from other investors through the stock market. Shares can only be sold in the secondary market.
Who can help in buying shares?
- A non-advisory brokerage service (usually an online broker, such as St. George DirectShares). This option allows you to buy and sell.
- a full service broker
- A financial advisor or planner
It is important to remember that share trading may not be easy and you should do proper research including getting quality advice before deciding to implement your investment strategy.