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Shares
Please read our Disclaimer
before continuing to read our information.
Johnston Investment Management Pty Ltd does not give
investment advice and we are not recommending the trading of shares.
The product/s you trade should be your personal choice after you
have investigated every aspect of trading it. Our objective is to
educate our clients and provide an effective futures brokerage service,
as we believe that you are the best person to manage your investments
and future. It's our goal to give people an unbiased view of all
the trading vehicles available, including shares.
The
Sharemarket
The
share market is the best place to start investing or trading equities.
There is less risk and the trading skills required are less than
any of the leveraged products such as options, futures, etc.
The
share market provides one of the best opportunities to achieve your
long term financial goals.
If you invested
$1000 ten years ago, then it would be worth :-
| Equities
(Shares) |
$3547 |
| Property |
$2433 |
| Fixed
Interest |
$2593 |
| Cash |
$1708 |
Source
: Australian Stock Exchange.
* Past performance
is not a guarantee of future returns.
Another
significant advantage is that you can start small. Your initial
purchase can be a parcel of shares valued as low as $500, although
many advisers would recommend starting with at least $2000.
Half of Australia's
adult population - 7.4 million people (November 2000, ASX, Australian
Share Ownership Survey) - have some exposure to the sharemarket,
including 5.7 million who directly invested in shares listed on
ASX, in 2000.
The
fear of the unknown and the misconception that you have to be wealthy
to invest in shares is rapidly disappearing. People who are being
exposed to the share market with floats of household named companies
are realising there are plenty of other opportunities in the markets.
Simply
put, owning shares is the ownership of part of a company. If a company
has 100,000 shares outstanding and you own
100 shares, then you own 1/1000 of the company. The value of the
share is related to how well the company is doing. As a shareholder,
you may be entitled to dividends, meaning you are paid part of the
company's profit. By owning shares in a company you also get to
vote at shareholders' meetings.
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The
Elements of the Sharemarket
The
stock market has two elements, known as the primary market and the
secondary market. The primary market brings together organisations
that need funds and investors who want to invest their capital efficiently.
A company sells shares in itself (usually through a stockbroker)
to investors, who become owners of the company.
The
secondary market is the medium provided by the Stock Exchange, which
gives investors the opportunity to buy or sell shares, as well as
trading other types of equity, debt securities and derivatives such
as options and warrants that are based on shares.
It
is true that much of the wealth of Australia, is created by the
large and small companies that are listed on the Stock Exchange.
By becoming a shareholder, you become a part owner of that company
and you can participate in the profit or loss generated by it, through
dividends (income) or share price movement (capital increase/decrease).
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Types
of Shares
There
are several different types of shares. It is important to know about
the different types of available securities in order to understand
your rights and responsibilities. The following list summarises
the key types of shares and the attributes associated with each.
Ordinary
shares: This is the most common form of share ownership where
the share owners receive benefits of dividend distribution, voting
rights at meetings, receive benefits from capital growth. If the
company is wound up, shareholders of ordinary shares rank last in
priority
Preference
shares: They usually have a fixed dividend rate. Preference
dividends are paid before ordinary dividends are announced and they
rank before ordinary shares in any distribution of assets
Contributing
shares : They are partly paid and require certain future payments
at certain future dates.
Shareholders
are obliged to pay outstanding capital when due, unless the company
is a no liability company in which case shares can be forfeited
instead.
Bonus
issue: Are a free issue of new shares to a company's shareholders,
usually on a predetermined ratio to the number of shares already
held. It usually reflects improved value of company's assets.
Rights
issue: This is a privilege granted to existing shareholders
to buy new shares in the same company, usually below the prevailing
market price. Rights may be taken up or, in some cases, sold on
the share market.
Buying
shares in a float: The word float is used when a company seeks
to raise capital by offering its shares to the public for the first
time. The company must first submit details of its business and
the proposed share issue to ASIC in the form of a prospectus. Once
it is registered by ASIC, it is sent to potential investors. After
studying the prospectus, you can apply for shares by completing
the attached application form, specifying the number of shares you
want to buy, and send it with your payment to the company or lodge
it with your broker. When the deadline is reached, you will be allocated
the number of shares available to you. You should obtain independent
advice from a licensed professional adviser prior to making any
final decision. Some recent floats are : AAPT, AMP, Cable &
Wireless Optus and former government businesses such as TAB, Commonwealth
Bank and Telstra Corporation.
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Direct
and Indirect Investment
Most
people have share investments of some form, direct or indirect.
In direct investment, you have a choice to own shares yourself and
buy or sell shares directly through a stockbroking firm.
You
can make an indirect investment by placing your money
with a fund manager to invest on your behalf. You can, for example,
buy units in a cash management trust, property trust or managed
share investment fund, or you can put your money into a superannuation
fund that invests in the sharemarket.
The
fund manager usually charges an ongoing fee for this service as
well as the entry and exit costs.
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Planning
Your Investment Strategy
As
with any investment decision, you have to plan your investment strategy.
Your share portfolio has to be part of your overall investment plan.
It is sound practice to ask yourself a few questions before you
enter the share market:
What do you
want to achieve from your investments?
Do you
want a return in the form of income or capital growth?
Are you
prepared to risk some of your investment capital for the opportunity
to make higher returns?
Do you
need additional security?
Your
age and time frame for investing may affect your decisions. A full
service broker or adviser can help assess your current financial
situation and help you set your financial goals for the future.
With the information available today, a large number of people are
spending the time to educate themselves and manage their own investment
decisions. Technology has levelled the playing field to allow the
private investor to make well informed investment decisions and
implement trading strategies as efficiently as the large organisations.
If
you have a spouse or partner, ensure they are fully informed about
your investment decisions.
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Choosing
Your Broker
Choosing
your broker is a important step in your investing or trading. As
your knowledge and trading skills improve, your requirements will
change. The first question is if you want a full service or discount
broker.
Full
service or Adviser:
Full service brokers offer advice on buying and selling shares,
make recommendations and provide research. They also offer advice
on other investments such as options, debentures and bonds and compile
tailored investment plans. As full service brokers offer advice
you generally pay a higher brokerage fee to buy and sell shares.
Some full service brokers offer the ability for you to place your
order online however they will still provide advice about the transaction
that you wish to complete. You may incur different charges for placing
your order online rather than via telephone.
Discount
Broker:
A discount broker does not offer advice or recommendations and their
brokerage fees tend to be lower than a full service broker. Some
discount brokers take orders by phone and most have an Internet
trading system This is an attractive option for investors confident
in their sharemarket knowledge and trading decisions.
Brokerage
rates on share transactions were deregulated in 1987 and, as a result,
the rates are sometimes negotiable.
A
list of brokers is available on the ASX website.
If
you are just starting out in the sharemarket and don't feel confident
in your sharemarket knowledge you will probably value the advice
of a full service broker. If you are interested in low cost trading
and are confident in your knowledge of the sharemarket and trading
skills, you may wish to choose a discount broker. I would suggest
that you only use Internet broking after you have developed your
trading skills and understand the sharemarket.
Before
placing buy or sell orders with a broker, spend some time to understand
how their trading system works and verify your responsibilities
in paying for and providing the shares you are trading.
Example:
You have three days from your trade execution to enable the transfer
of these shares, either by organising payment for the stock you
have purchased, or providing access to shares you have sold.
Most
stockbroking firms require you to set up a client account and provide
funds prior to accepting your first order to buy shares. It is common
practice to establish a cash management account with a bank or financial
institution to facilitate easy transfer of funds to pay for your
purchase of shares and to allocate proceeds to you from the sales
of shares.
Placing
your order
-
‘at
market’, meaning you will accept a price at or about the
market price of the shares at the time you are placing the order.
-
‘at
limit’, when you want to limit the price you want to buy
or sell at, e.g. the highest price you are prepared to pay or
the lowest price at which you will sell. ( Know how long the
order will be in the market and don't forget to cancel it if
you change your mind about the transaction )
There
are a few brokers who will accept “stop” or “stop
limit ” orders. These particular types of orders can assist
in trade and risk management. ‘Stop orders’ is short for
stop loss orders, and when they are placed in the market, will activate
a transaction if the share price reaches your risk management price.
When
placing an order with your broker, be clear and precise. They should
then repeat the order back to you. Ask for conformation of a transaction
as soon as possible. They should be able to complete market orders
while you are on the phone.
When
placing orders on the Internet, double check the share code, price
and number of shares are correct before transmitting the order.
You should get a conformation of the order and any transactions
electronically. Transaction are confirmed by email.
All
share holdings are now registered electronically on either CHESS
or the issuer sponsored sub-register. CHESS (the Clearing House
Electronic Sub-register System) is operated by a subsidiary of ASX
on behalf of the listed companies. Issuer sponsorship involves the
company (or issuer) through which the shares are issued, controlling
the shareholding on your behalf. To hold shares electronically on
CHESS, you enter into an arrangement with your broking firm to act
as your CHESS sponsor. The adviser can then electronically register
details of any purchases or sales. Contact your broker for more
information on CHESS.
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Share
Analysis
Share
selection is determined by one of three techniques:
 Technical
Analysis Fundamental
Analysis A
combination of the above
Technical
Analysis
Technicians
make their trade selections by observing price movement on charts.
It's not about forecasting the future share prices. It's about observing
what the large informed money is doing and determining the probable
price direction. When this is determined, entry and exit strategies
are triggered and the investment or trade is monitored with very
specific risk management rules. By the very nature of the markets
and human psychology, all the information about a share is reflected
in the price movement. Technical analysis does not have to be complicated,
in fact simple, practical techniques are best. Technical analysis
is easier, simpler and more controllable than fundamental analysis.
We have clients who manage their investment shares or superannuation
shares in a few minutes a week. That's not much work to protect
your investment capital. Most professional investors or traders
use some form of technical analysis, so I think that it's a good
idea for private investors to do the same.
Fundamental
Analysis
Fundamentalists
are also called value investors. Looking at factors, fundamentalists
try to determine the value growth of a company in the long-run,
factors such as earnings, dividends, and book values. They expect
stock prices to go up as earnings of the company grow. They use
a buy-and-hold approach in stock investing. The problem is that
prices don't do what we expect them to do and that makes risk and
money management very difficult. Fundamental analysis is very time
consuming and the information available to private investors is
often very out date, inaccurate and conflicting.
A
combination of the Fundamental and Technical Analysis
Some
investors use a combination to select their investment shares. The
fundamentals can give the big picture and the technical analysis
can provide the timing and risk management. The risk and money management
is a very important aspect of your investing. It is said that 80%
of trading failures are a direct result of not managing losing trades
(money management).
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Tax
Considerations
Before
investing, take the time to discuss your trading with your accountant
or tax adviser as there can be tax benefits associated with share
investment. GST will not be imposed on the purchase or sale value
of shares bought and sold, as these transactions are a financial
supply. GST will be imposed on brokerage fees associated with such
transactions.
Dividend
imputation now allows the shareholder to gain the benefit of company
tax which has already been paid.
Franked
dividends are those paid out of profits on which a resident company
has paid company tax in Australia. These carry imputation credits
which entitle shareholders to a rebate or a reduction in the amount
of tax to be paid. If the shareholder's marginal rate of tax is
lower than the company tax rate, the excess franking rebate can
be used to reduce the tax payable on other sources of income. The
value of imputation credits depends on the rate of tax the company
has paid. Companies may pay fully franked, partially franked or
unfranked dividends.
Employee
share schemes allow employees to purchase shares at a discount to
the market price as an incentive to take up shares in the company.
Capital
gains tax could be accessed in the sale of shares if you sell them
for more than you paid. If your shares were purchased on or after
21 September 1999, the new CGT system will apply to you. In this
case, if the shares are sold 12 months or more after the date of
acquisition, then only half of the realised gain from the disposal
of these shares will be included in your taxable income. However,
if the holding period was less than twelve months, no concession
under the new system will apply and the full value of realised gain
will be included in your taxable income. Under the new system, there
is no indexation.
If
the shares were purchased prior to 21 September 1999 but sold after
this date, you have a choice as to how to calculate the taxable
capital gain. You can choose to apply the new discount rules and
forgo indexation (see above). Or you can retain a degree of indexation
of the cost base, but forgo the discount. Note that indexation does
not extend beyond the September quarter 1999.
For information and advice on the tax implications of share investments
you should consult your accountant or tax adviser.
For
other share information visit our Glossary
of share market terms.
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