What is the share market
Thinking of buying some shares, but unsure of the benefits or how to get started?
Shares can be risky as well as exciting. It's important to understand the risks and to get advice from the right people, but if you're ready to start investing, here are some important basics 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.
To help, this article offers a straightforward introduction to the share market, and some of its key components.
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 a national share market - the Australian Securities Exchange (usually referred to as the ASX). Recent legislative changes have also enabled a new share market, Chi-X, to start operating here in Australia. All Australian stockbrokers are now required by law to provide buyers and sellers with access to both share markets.
In the past, trading on the share market happened in a physical location - with stockbrokers taking constant phone calls and rapidly buying and selling on behalf of the public. Today, with the help of technology, both the ASX and Chi-X can connect buyers and sellers via the internet - meaning trades can happen virtually anywhere.
In Australia, the share market has two main responsibilities. The first is operating what's referred to as a 'primary market', which allows companies to raise money by issuing shares for sale. The second is 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 have in a company. The value of your share depends on several factors - mainly how much money the company or asset earns, and the exchange rate at the time that you happen to be buying or selling.
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.
4. What are the benefits of being a shareholder?
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. It's important to be aware that there are no safeguards when it comes to being a shareholder - and sometimes, the value of your shares may fall to zero.
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. To do so here in Australia, companies need to lodge a prospectus with the Australian Securities Investments Commission (ASIC), and issue all potential investors with a copy of this prospectus once it has been approved by 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:
If the company or asset that you have shares in makes a profit, and the directors of the company decide to do so, this profit (or a portion of it) may be divided amongst all shareholders as a payment, or dividend. 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.
If the company has already paid tax on their profits, then 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 fifty percent discount on any capital gains tax that you incur. Always seek your own independent advice on any tax benefits from share trading.
The other main way of making money through shares is through share price growth if you sell your shares at a higher price than what you paid for them.
An advantage of shares is that they can be bought and sold very easily, and very quickly. You can usually sell shares and then access the cash in just a few days. This allows you to respond to any increase in the price of your shares quite quickly. Unlike property, there are no complicated legal processes and you can access your proceeds at settlement. Plus, unlike property, you can always sell a portion of your share portfolio if you need extra money.
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. For you, it means you can increase the number of shares you have in a company at a discounted price, if you are confident of its potential. Even if you decide not to take up their offer, you can 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 in order to be eligible.
8. What are the risks of trading on the share market?
Along with the many benefits, there are also some risks to trading on the share market. These include:
As share prices can rise and fall rapidly, you need to accept that the value of your shares may fluctuate by as much as 50 per cent or more in a 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. It's important to always do your research and obtain your own independent expert advice in areas where you've still got questions.
Your investment strategies or your individual investments could be affected by changes to current law, including in relation to any tax benefits your may enjoy as a shareholder.
If you have overseas investments, you need to think about how adverse movements in currency may affect your shares. This is because, when you bring your profits home, they need to be converted from the foreign currency into Australian dollars.
9. How do you buy and sell on the share market?
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.
10. Who can help you buy and sell shares?
There are three channels through which you can buy and sell shares. These include:
- A non-advisory broking service (generally, an online broker such as Westpac Share Trading). This option allows you to buy and sell.
- 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 isn't always easy. However, a little understanding, and the right advice, could make a big difference, especially when it comes to how you manage the risks.
Things you should know
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