Investing in shares can be a powerful way to build wealth and achieve financial goals. Shares offer the potential for higher returns compared to traditional savings accounts and bonds, making them an attractive option for those looking to grow their investments over time. By owning shares, you gain a stake in a company’s success, which can lead to capital gains and dividend income. Additionally, shares provide liquidity and flexibility, allowing you to buy and sell them relatively easily. Understanding the benefits, risks, and strategies associated with share investing is crucial for making informed decisions and maximising your investment potential.
What is a Share?
A share represents a unit of ownership in a company. When you purchase shares, you become a part-owner of that company, entitling you to a portion of its profits and assets. Owning shares can provide economic benefits such as capital gains, where the value of your shares increases over time, and dividends, which are periodic payments made to shareholders from the company’s profits.
Shares have a long history, dating back to the 1600s with the establishment of the Dutch East India Company. Over time, the concept of shares has evolved, becoming a cornerstone of modern financial markets. Some essential terms include dividends, capital gains, brokers, and the Australian Securities Exchange (ASX), where many Australian companies are listed.
Types of Shares
Publicly listed shares are traded on stock exchanges like the ASX, making them accessible to the general public. In contrast, private company shares are not publicly traded and are typically held by a smaller group of investors. The Australian Securities Exchange (ASX) and the New York Stock Exchange (NYSE) are prominent examples of stock exchanges where shares are bought and sold.
Dividends are payments made to shareholders from a company’s profits, and voting rights allow shareholders to vote on important company matters, such as electing the board of directors.
Getting Exposure to Shares
Investors can gain exposure to shares through various methods, each with its own strengths and weaknesses. The three primary approaches are direct holdings, managed funds, and exchange-traded funds (ETFs).
- Direct Holdings: This method involves purchasing shares directly through a brokerage account. By owning shares outright, investors have full control over their investment decisions and can select specific companies to invest in. The main advantage of direct holdings is the potential for higher returns, as investors can benefit directly from capital gains and dividends. Additionally, shareholders often have voting rights, allowing them to influence company decisions. However, this approach requires significant research and due diligence, as well as a higher level of involvement in managing the portfolio. It also exposes investors to company-specific risks.
- Managed Funds: Managed funds pool money from multiple investors to invest in a diversified portfolio of shares, managed by professional fund managers. This approach offers the benefit of professional management and diversification, reducing the risk associated with individual investments. Managed funds can be actively managed, where fund managers make investment decisions to outperform the market, or passively managed, where the fund tracks a specific index. The main drawback of managed funds is the management fees, which can erode returns over time. Additionally, investors have less control over the specific shares in the portfolio.
- Exchange-Traded Funds (ETFs): ETFs are investment funds that trade on stock exchanges, similar to individual shares. They offer a way to invest in a diversified portfolio of shares with the flexibility of trading throughout the day. ETFs can track specific indices, sectors, or themes, providing broad market exposure or targeted investments. The advantages of ETFs include lower management fees compared to managed funds, high liquidity, and ease of trading. However, like managed funds, investors have less control over the specific shares in the ETF. Additionally, while ETFs offer diversification, they still carry market risk.
The age-old debate – Property vs. Shares
At Bartons, we believe that both property and shares have an important role to play in a diversified investment portfolio. Each asset class offers unique benefits and risks, and understanding these can help investors make informed decisions that align with their financial goals and risk tolerance.
- Benefits of Investing in Property: Property investment provides several advantages. One of the key benefits is the potential for capital growth. Historically, Australian property values have shown significant long-term appreciation. Additionally, property can generate a steady stream of rental income, providing positive cash flow. Property is also considered a tangible asset, which many investors find reassuring. Another significant advantage is the willingness of banks to lend against property. Typically, banks offer better interest rates and higher loan-to-value ratios (LVR) for property loans compared to margin loans for shares. This makes it easier for investors to leverage their property investments. Furthermore, property investments can offer tax benefits, such as deductions for expenses related to the management and maintenance of rental properties.
- Benefits of Investing in Shares: Shares are highly liquid, meaning they can be quickly bought and sold on the stock market. This flexibility allows investors to respond swiftly to market changes. Historically, shares have provided higher returns compared to other investment options like bonds and savings accounts. Investing in shares allows you to diversify your portfolio, spreading risk across different sectors and companies. As a shareholder, you have a say in company decisions through voting rights, giving you a degree of influence over the company’s direction.
- Risks of Investing in Property: While property can be a stable investment, it is not without risks. Property values can fluctuate, and there can be periods of low rental demand. Additionally, property requires ongoing maintenance and management, which can be time-consuming and costly. High entry costs and less liquidity compared to shares are also considerations.
- Risks of Investing in Shares: Share prices can fluctuate significantly due to market conditions, leading to potential losses. Economic events, such as changes in interest rates or economic downturns, can impact share prices. Factors specific to a company, such as management decisions or financial performance, can affect its share price. Changes in regulations or political instability can also impact the performance of shares.
Tax Treatment of Owning Shares
When owning shares, it’s important to understand the tax implications, which include capital gains tax, tax on dividends, and franking credits. According to the Australian Taxation Office (ATO), capital gains tax (CGT) applies when you sell your shares for a profit. The capital gain is the difference between the purchase price and the sale price of the shares. If you hold the shares for more than 12 months, you may be eligible for a 50% discount on the capital gain.
Dividends received from shares are considered assessable income and must be declared on your tax return. These dividends are taxed at your marginal tax rate. However, many Australian companies pay dividends that come with franking credits, which represent the tax the company has already paid on its profits. Franking credits can be used to offset your tax liability, and if the credits exceed your tax payable, you may be eligible for a refund.
Summary
In summary, investing in shares offers numerous benefits, including liquidity, potential for high returns, and diversification. However, it’s essential to be aware of the associated risks and conduct thorough research before investing. Speak with our team at Bartons for personalised advice.
This general advice has been prepared without taking account of your objectives, financial situation or needs. You should consider the appropriateness of this advice before acting on it. If this general advice relates to acquiring a financial product, you should obtain a Product disclosure Statement before deciding to acquire the product.