Guide on Investing In Shares

Shares represent a unit of ownership in a company. When you purchase a share of a company, you become a part owner of the company alongside other shareholders. Approximately 50 percent or more of Australians invest in shares directly through dealing with stock brokers or indirectly through managed funds and super funds. What?s more, according to a research report released by the Australian Stock Exchange, the number of equities/ shares investors across different age groups, income levels and education backgrounds is on the increase.  If we include superannuation funds, indirectly this means the majority of people in Australia who have super are invested into the share market in some way. Here some tips for those looking to invest in shares.

Why do people invest in shares?

Shares have historically outperformed other asset classes in the long term. The return on investment of shares is usually in form of dividends or capital growth of the market share price. According to the latest Russell Long Term Investment Report, investors in Australian shares enjoyed a 9.2 per cent return before tax and after fees ? a return that was higher than those of other investments covered in ASX survey.  Investors in residential investment property in the same survey only got a 6.1 per cent return.

Equity investors also enjoy a tax benefit that is not enjoyed by investors of other classes of assets. When a company distributes profits (dividends) to shareholders that are net of corporate tax, the investors/shareholders are entitled to a tax credit up to the corporate tax rate.

Shares are also a preferred investment vehicle among several investors due to their high liquidity as opposed to assets such as investment property. You can easily dispose of your shares listed in a stock exchange for cash. You can buy and sell shares of a listed company through a stockbroker or using an online trading account. There are various types of shares you can invest in: ordinary shares, preference shares, options, warrants and partly-paid shares.

Market Indices And The Big Picture

Market indices help provide a big picture about what is happening in the broad equities market. The indices are often based on size (market capitalization) or industry sector. For example, the S&P/ASX 50 groups the 50 biggest stocks by market capitalization (calculated by multiplying the number of shares on issue by the share price), while the Utilities sector index covers electricity, gas and water companies. The benchmark currently used by fund managers is the S&P/ASX 200 which represents the 200 biggest stocks in the Australian Stock Exchange. Using market indices, you can determine how a particular electricity stock performing compared with the utilities index, how a specific counter is performing in relation to the overall market and whether a particular stock is cheap or expensive compared with similar stocks.

Investing In Stocks Checklist

Shares generally have high growth and high return profiles in the long term. While their potential for high returns is high, shares also come with relatively higher risks and greater short term volatility compared to other asset classes. Therefore, before investing in shares, you should be clear about:

  • the time frame for your investment,
  • the level of return you seek,
  • the level of risk you are prepared to take,
  • the form of return you seek in shares (capital growth or dividends) and
  • the investment strategy you will adopt (buy and hold strategy or active trading strategy).

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