Investing in Shares
What Are Shares?
Shares in a company equate to an entitlement of ownership over the company you have invested in. A person who buys a portion of a company's capital, becomes a shareholder in that company's assets and as such is entitled to a share of the company's profits.
Shares that are bought in a listed entity are able to be traded on the stock exchange they are quoted. This can be done for many reasons such as to make your investment liquid, to swap into another product or company, or to realise a capital gain on the sale of the share as the market price is higher than the price you paid for the product.
Why do Investors buy shares?
There are many benefits to owning shares which make it an investment well worth adding to your investment portfolio. Listed are five advantages of investing in shares:
- 1. Capital growth
- A long term objective of share investment is to take advantage of capital growth. This occurs when an individual experiences significant capital gains from the shares they posses through increases in share prices. Some companies also issue free or bonus shares to their shareholders as another way of passing on company profits or increases in their net worth.
- 2. Dividends
- Ownership in a Company entitles you to ownership of their post-tax profits. Some companies honour this entitlement to their shareholders in the form of dividends. Since dividend imputation was introduced in Australia in 1987, dividends issued by Australian companies earning their profits within Australia have become an attractive option to investors. Dividend imputation means that tax is paid at the company tax rate of 30% which is especially attractive to high income earners.
- Another dividend approach used by some companies is to have dividends reinvested in the company through dividend reinvestment plans (DRIP). In this philosophy additional shares are issued to shareholders, rather than paying out dividends in cash. The propensity to do this will be often outlined in a company’s constitution and discussed at annual meetings.
- 3. Liquidity
- By their nature, listed shares are a very liquid product. They can be bought and sold quickly on an exchange platform rather than having to go through the gruelling process of having to look for a transferee, and also through the use of a broker at a relatively low cost to other products, all the work is done for you. Trading on an exchange also allows you to sell part of your share parcels rather than having to redeem the whole lot.
- 4. Diversification
- Different financial products have different characteristics, volatility and are affected by different economic circumstances. To minimise risk and maximise return, diversification of products is essential to achieving a return on your portfolio as close as possible to your target. In order to diversify your investment portfolio, you will probably have part of your money invested in the share market. Shares can be purchased directly through a broker or as part of a managed fund.
- 5. Shareholder Benefits
- Some listed companies in many sectors from retail and hospitality/entertainment to financial services, offer generous discounts to shareholders when they buy goods or services from the companies or their subsidiaries. In most cases a minimum parcel of shares need to be held to qualify for these benefits.
- Other benefits can arise through the different tax incentives offered by companies. These can come in the form of imputation credits from companies and other tax benefits offered by start-up industries, RD intensive industries and pooled development funds. All these create a product that both has a secondary market to keep liquid as well as paying out larger revenue streams when compared to your tax bracket.
- For more information on the benefits of shares for your investment portfolio contact one of SSX’s Registered Brokers.