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Sharemarket basics
What are shares?
When you buy shares in a company, you are buying a part of that
company. This means you share in the company’s performance in
the form of profits which can be given to you as dividends and/or
capital growth through the value of your shares increasing.
The company you are investing in benefits by using your money and
that of other investors to finance its business or its expansion,
without having to borrow money.
Benefits of investing in shares
Outperforms other investments over the longer term
Although past performance is no indication of future performance,
history suggests that Australian shares have outperformed other
types of investment over the longer term. To find out more you can
read the report (pdf 33K*) by independent actuaries Towers Perrin comparing the
performance of shares to other investments over 10 years.
Tax benefits
The performance of shares becomes even more attractive when tax
benefits are taken into account. Where companies have already paid
tax on their profits, tax credits known as franking credits may be
attached to the dividends the company pays to you. These franking
credits can be used to offset tax payable by you on other income.
In addition, shares held for more than 12 months qualify for a 50%
discount on any capital gains tax payable.
Diversification
Many people know the saying “don’t put all your eggs in one
basket”. The Australian sharemarket helps you to do this by
offering a wide choice of companies to invest in. There are over
1300 companies listed on ASX. These companies are involved in a
wide range of industries covering most sectors of the economy
including financial services, industrials and healthcare. By
investing in a range of companies you can spread your risk.
Flexibility
You can buy and sell shares fast. You can sell shares and
generally have access to your money in no more than three days.
Other investments often take longer to sell and get your money
back. This concept is known as liquidity. (Liquid investments have
the benefit of greater flexibility).
Control over your financial future
You can decide exactly how your money is invested, enabling you to
have a lot of control over your finances. You can of course choose
to share this responsibility with a stock broker who can advise
you on what shares to buy and sell.
What does it cost?
Trading shares has become much cheaper in recent years as stock
brokers have made use of new technology to provide a better
service to you. Buying and selling shares can cost as little as
$15 for a transaction-only service. You may need to pay more if
you want advice and/or access to research on a company.
What risks are there?
Although the sharemarket historically has outperformed other
investments over the long term, the market can experience
volatility in the short term. Individual stock prices can go down
as well as up. It is important to monitor your shares’
performance, and to regularly re-evaluate whether they continue to
be a good investment for you. |
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