What are Shares?
A share is part ownership of a business. When companies wish to raise capital, they have two options
- Borrow money from a financial institution
- List on the stock market and issue shares
Companies may list on the market for the first time through an Initial Public Offering (IPO). However they may also issue shares after an IPO through Share Purchase Plans, placements, rights issues. These are discussed in further detail later in this article.
Why trade Shares?
People invest in shares to achieve financial goals – either through share price growth or via income paid as dividends. Shares are relatively easy to buy and sell and can help you diversify your portfolio.
The main benefits of investing in shares are:
- Dividends
- Franking Credits
- Capital Gains
- Flexibility/liquidity
- Tax Deferred Income
Dividends and Franking Credits
Please see the dividend section by clicking here.
Capital Gains
Investors purchase shares with the expectation that they will increase in value and grow their capital over time. The chart below (sourced from IRESS Technologies 2010) shows the All Ordinaries index from 1980 - 2010. As one can see, capital gains in the stock market are significant. Since 1980, the market has rallied from 529 points to 4672 (as of Feb 2010) this is a rally of 8.8 times despite two severe corrections in 1989 and 2008. Investors holding shares for capital gains would have received a return of 8.8 times over 30 years or a compounded 29% per annum plus dividends. For this reason, the stock market is considered one of the most volatile and also highest yielding investments.
Flexibility and Liquidity
Flexibility and liquidity is also a huge advantage of investing in the Stock Market. Shares can be bought and sold, on the same day and are settled on a T+3 basis. This means funds are transferred back to your account after 3 days of selling any shares. In comparison to many other types of investment such as property, shares are extremely liquid.
There are no minimum holding times for shares, unlike some fixed interest investments which require funds to be locked away for a certain period of time.
There is a minimum of a $500.00 parcel size when purchasing shares. When holding shares, an investor can sell, parts of their holding to free capital.
Diversification
Diversification is the allocation of funds to a variety of assets with the aim of reducing exposure to any one position. True diversification should consider various asset classes such as shares, interest rate securities and property etc. When aiming to diversify within the stock market, different industry segments should be considered.
The main sectors are listed below:
- Financial
- Industrials
- Telecommunications
- Materials
- Consumer Discretionary
- Health Care
- Consumer Staples
- Energy
- IT
- Utilities
The Australian Index is made up of the stocks below:
Sourced from IRESS Technology 2010, the Market Map below shows stocks grouped by Industry and Index points as at Feb 2010.
What Moves Share Prices?
Shares are affected by a multitude of different things.
These include:
Technical chart formations: click here to be directed to the technical analysis section
Fundamental changes to a stocks outlook: click here to be directed to the fundamental analysis section
Economic Factors
The Cycle of Emotions
