Public companies issue shares, which allow investors to buy a part of a particular company. Share ownership entitles you to part of the company profits if dividends are paid.
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. They usually set the level of the market. Remember—all shares are affected by share market fluctuations. Individual share prices also vary based on supply and demand from sellers and buyers.
You can buy and sell shares listed on a stock exchange through a stockbroker. With all share transactions now being processed electronically investors will have either a company issuer sponsor holding statement or a clearing house electronic subregister system (CHESS) holding statement detailing the opening balance and closing balance for the month a transaction occurs.
As a shareholder you have a say in the company’s future through voting rights. You will be kept informed about the company through its annual report and other correspondence.
You need to keep careful records, because capital gains tax calculations can become complex, especially in a dividend reinvestment plan.
Dividend reinvestment plans
Some companies offer shareholders dividend reinvestment plans. If you participate in these plans, you can increase your shareholding by re-investing all or part of your dividend in extra shares, usually at a discount on the market price. There is no brokerage or stamp duty on shares obtained this way.
How do shares work?
Duration: Unless you plan to actively trade your shares, you should consider them a long‑term investment.
Minimum investment: May apply. You can get details from any stockbroker.
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. Capital gains or capital losses are possible.
Access to your funds: Listed shares can usually be traded readily through a stockbroker. However, shares in small companies with low turnover may be difficult to sell particularly in times of market downturn. If the company is being wound up or liquidated, shareholders are the last to be paid.
Fees: Stockbrokers charge a brokerage fee that may be a flat fee up to specified amounts and a percentage of the value of the share parcel over this threshold. The level of service provided and advice given may vary depending on the fee charged. Discount brokers charge lower fees, but may not provide research information or other advice.
What are the risks?
- The value of shares can be volatile depending on a range of economic factors and market sentiment.
- If a company experiences financial problems the value of shares can fall.
- Often those shares offering the highest levels of return also involve higher levels of risk.
- There is always the risk that people will be unable to sell shares when they need to although in a today’s global market this is a less serious concern.
What are the advantages?
- Shares can provide both capital growth when share values increase and regular income from dividends.
- Shares can be tax effective based on imputation credits where tax already paid on shares can be used to offset other taxes liable.
- During periods of strong economic growth, shares can provide higher returns then interest based investments such as term deposits.
- Shares require little ongoing maintenance unlike investments such as property.
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Dividend imputation
A dividend is a distribution from the company’s profit. Dividends that have full company tax paid are known as fully franked. If you receive a franked dividend, a tax credit (known as an imputation credit) is available to you. This prevents tax being paid by the company and again by you. Some dividends may be only partly franked or unfranked.
When you are paid a dividend, you receive a statement that tells you what portion of your dividend is franked, what portion is unfranked, and what your imputation credit is. If you lodge a taxation return, you must show these details.
The dividend imputation system may reduce the amount of personal income tax you have to pay. If you do not have a tax liability or you have an excess credit after tax and the Medicare levy, the excess is refunded to you when you lodge your tax return. You may be entitled to a refund, even if you don’t normally fill out a tax return. You would not need to lodge a tax return if, for example, you are receiving a maximum rate of Age Pension or earn less than the tax free threshold.
Excess dividend imputation credits are refundable to Australian resident taxpayers. This means that self-funded retirees, and other low-income resident individuals, can receive a refund of the difference between company tax paid in respect of their dividends (the dividend imputation credit) and their marginal tax rate.
For self-funded retirees who are required to lodge a tax return, any refund of excess imputation credits will be automatically calculated. Where self-funded retirees are not required to lodge a tax return, they are able to receive a full refund of imputation credits. For more information about the conditions that apply and how you can claim visit www.ato.gov.au or phone the ATO Help Line on 13 2861 during normal business hours.
How to go about investing in the share market
- The Australian Stock Exchange can help if you are uncertain about how to get started in share investing or how to find a stockbroker. The phone number of its corporate relations departments in all capital cities is 1300 300 279, for the cost of a local call.
- The Australian Securities & Investments Commission (ASIC) also provides a service to protect small investors. For information about your rights as a shareholder, phone the ASIC Infoline on 1300 300 630.
- The Australian Shareholders’ Association Limited may also be able to provide information and assistance. Phone 1300 368 448.
Margin lending
Borrowing to purchase assets, commonly shares, is a strategy that has been used to provide the investor primarily with a tax advantage. Many lenders provide margin loans which means they lend up to a percentage of the value of the asset securing the loan. If the value of the asset falls, the lender will require the amount of the debt to be reduced or more security to be provided.
Margin loans are often sought by people who plan to profit from the movement in the value of their assets and realise on the gain. The interest cost is claimed as a deduction against their income tax liability. The risk with this strategy is that the value of the shares remains the same or falls. Where the value remains the same the only real cost is that of the interest which you would have to carry for an extended period. In the event of the value of the shares falling you will either have to put up additional security or sell the shares to repay the debt and this loss will come out of the margin held, which was your contribution to the purchase.
Warrants
Warrants are an alternative way of buying shares. Instead of paying the full amount at the time of purchase, you pay part of the purchase price. Any dividends earned on the shares are used to pay off the capital amount outstanding. Normally, warrants are in force for 10 years. At the end of the period, if the shares have done well, they will have been fully paid for. If not, you as the purchaser have to make up the difference.
Listed investment companies
Listed investment companies can offer similar type of investments as equity trusts. The company buys shares in other companies, financial instruments, income earning assets or goodwill. Then, as a company, its own shares are quoted on the stock exchange and can be bought through a stockbroker. The value of the company’s shares will vary with the value of the investments it holds, and also with the share market’s opinion of the value of the company itself.