Share Investing - The Basics

In most countries, public companies issue shares, which allow investors to buy a part of a particular company. Share ownership entitles the investor to part of the company profits if dividends are paid.

In general, shares may be classified in a range from conservative to speculative.

Blue chip is often used to describe the highest quality shares, as they are shares in companies with a proven track record, producing profits in good times and bad. Importantly, they usually set the level of the market, and are used as the constituents of the indices. However, all shares, including the blue chip, are affected by share market fluctuations. On an individual basis, the share price will also vary from day to day, week to week, based on supply and demand from sellers and buyers. ?

In Australia, when the investor buys a parcel of shares, they receive a CHESS statement of holdings from the company, showing the number of shares they own and the date they were purchased.

As a shareholder, the investor has a say in the company's future through voting rights. The shareholder will be kept informed about the company through its annual report and other correspondence.

Dividend Reinvestment Plans

Some companies offer shareholders a dividend reinvestment plan. If the share investor participates in these plans, they can increase their shareholding by re-investing all or part of the dividend in extra shares, usually at a discount on the market price. There is no brokerage or stamp duty on shares obtained this way.

Returns:

Shareholders accept the risks and responsibilities of ownership, but hope to share in the company's profits by receiving dividends. The dividends may have tax advantages from imputation credits (franking credits). Capital gains or capital losses are possible.

Access to funds: Listed shares can usually be traded readily through a stockbroker.

Other Things to Consider

• Share prices fall as well as rise. Large losses may occur, particularly if shares are sold when the market has dropped.
• If the investor is happy with the gains made with their shares and are concerned about their future value, they can sell them and realise a profit. If the investor retains them with a view to profit further and the market value drops, it is important to remember this loss is only 'on paper' unless they sell.
• Income from dividends may vary. When profits are low, dividends may be low or even nil.
• Unless the shareholder intends to actively trade shares, they are generally considered a medium to long-term investment.
• The shareholder needs to keep careful records, because capital gains tax calculations can become complex, especially in a dividend reinvestment plan.
• If the company is being wound up or liquidated, shareholders are the last to be paid.
• Shares in small companies with low turnover may be difficult to sell particularly in times of market downturn