Investing in Shares Understanding Your Shares. Australian Shareholders Association Tutorial Resource Library

Transcription

1 Investing in Shares Understanding Your Shares Australian Shareholders Association Tutorial Resource Library

2 Disclaimer The ASA is not licensed to give financial advice. The content of these presentations is not designed to provide any specific investment advice to any person present. The ASA does not accept any responsibility to inform you of any matter that subsequently comes to our notice that may affect any of the information discussed. Anyone wishing to act on any matter discussed should seek independent advice from a licensed financial adviser.

3 Outline Common Terms Risks and Benefits Shareholder Rights Types of Shares ASX Sectors

4 Overview Before you jump in and buy your first share it is important that you gain an understanding of what is involved in being a shareholder so that you can make the most of your investing activities. No matter what type of investor you are short, medium or long term knowing how shares work is a must.

5 Common Terms Let s take a look at some of the more common terms that you might come across in the media or on your brokers website. What is a Share? A share is the smallest unit of division of ownership in a company. Let s take a look at an example.

6 Share Example Large publicly listed companies can have millions of shares that are owned by large numbers of shareholders. You might have a private company where you and your spouse own 1 share each.

7 Share or Stock? You will often hear the words share or stock used interchangeably and that s fine for everyday use stock market and share market mean the same. Technically though, the term stock is the total of all shares on issue for a particular company.

8 What is a Parcel of Shares? A parcel of shares is a distinct number of shares of one particular company that you own. You can own a parcel of 1000 shares of a company which will represent a certain % ownership or equity in the stock of that company.

9 Holdings You can purchase different parcels of shares in the same company at different times. Each parcel of shares that you own added together make up your holding or equity in the stock of that company.

10 Portfolio Your portfolio is the total holdings of all the companies in which you own shares. Portfolio value is often calculated by multiplying the number of shares you own in a company by the market price of that share and then adding all of these amounts together. E.g. Holding 1 XYZ Ltd 3000 $4.50 $13,500 Holding 2 ABC Ltd 10,000 $1.21 $12,100 Total Portfolio Value $25,600

11 What actually is the Share market? A share (or stock) market is the market where shares are bought and sold or traded. There is no physical share market as all transactions are conducted electronically. A share market has 2 main functions: 1. Primary to allow companies to raise money by issuing shares through an Initial Public offering or float 2. Secondary to allow investors to buy and sell shares at prices that are determined by supply and demand factors

12 Bull Market To be in a bull market means that the prices of stocks on average are moving higher because generally the buyers are more bullish they are keen to purchase as they believe prices will move higher still.

13 Bear Market A bear market is the opposite it means that prices are generally falling because the sellers are more bearish they believe that prices will fall and are keen to sell.

14 What is a trend? When prices move consistently over time in the one direction the market is said to be trending. However, the nature of markets is that they don t consistently move in the one direction they pause or reverse direction.

15 Uptrend & Downtrend When prices rise consistently over time the market is said to be bullish or in an uptrend. When prices fall consistently over time the market is said to be bearish or in a downtrend

16 Trending both ways? However, because we know prices don t consistently move in the one direction all the time a market or an individual stock can, at the SAME TIME, be in: a long term uptrend AND a short term downtrend

17 Long term vs short term? The terms long term and short term mean different things to different investors. It s important that you know what the terms mean for you so that you can: Be clear about your own investing timeframes Carefully interpret the information you read Analyse a shares price action to know whether it is trending up or down.

18 No right or wrong There are many ways to measure trends and there is no right or wrong way to analyse a trend. All you can do is decide what sort of investor you are and decide on a way to measure a trend that suits your investing style.

19 Long term Investor For example, if you are a multi-year investor, then a short term down trend may be nothing to worry about. Of course the short term down trend may be the start of something bigger that is why how you define long and short term is so important. Your definitions and ways of measuring will mean that you can make appropriate decisions for you.

20 Investor or Trader? Often these terms are used interchangeably but there is a difference which may impact your tax position. A very simple differentiation is that: Investors are interested in longer term capital growth and the income that can be derived from their shareholdings Traders are interested in shorter-term capital growth

21 What the ATO says... Investors Investors pay tax on the capital gain they make when they sell a share in other words the difference between what it cost to own a share and what was received when the asset was sold. Investors who own their shares for more than 12 months are entitled to reduce their capital gain by the capital gain discount of 50%.

22 What the ATO says... Traders If you meet certain ATO guidelines you can choose to classify yourself as a share trader because you are carrying on a business of share trading. Share traders pay tax on all income, including the sale of shares. To offset this income they can claim brokerage and purchases of shares as deductible expenses. They are unable to access the 50% capital gains discount if they do happen to hold shares for longer than 12 months.

23 Share Codes For easy identification, each stock that trades on a market is allocated a code. In Australia, the code is usually 3 letters. For example the code for Rio Tinto Limited is RIO and the code for Flight Centre Travel Group Limited is FLT

24 Share Codes You should be able to find these codes and associated information on the shares on your brokers websites or on the ASX website. More than 5 letters in a code usually indicates some sort of warrant or preference share (more on these later)

25 What are the risks for owning shares? You often hear people say shares are too risky! Let s explore a few of the risks in owning shares: Price movement share values can increase and decrease in price rapidly this is called share price volatility. Having a strategy in place to manage share price volatility is important.

26 More risks Losing all your investment share values can fall to zero as an owner of a share, generally you will be last in the line of creditors to receive any money if a company fails.

27 More risks Lack of control unexpected events outside of your control can seriously affect your share holdings. This may be company specific or a natural or man-made disaster that affects the entire share market.

28 Overcoming Risk The good news is that risks can be managed by various strategies available to the investor so on balance, the benefits tend to outweigh the risks for most investors. Actions you can take to overcome risk and benefit from shares include: Increasing your knowledge of shares and how to invest safely understanding where your sleep at night factor lies ( i.e. how much risk you can wear).

29 What are the benefits? There are quite a few benefits of investing in shares. Let s explore a few: Flexibility you can choose to invest small or large amounts, you can spread your investments to reduce your risk, you can change your approach if you decide you have made a mistake

30 More benefits Capital Growth & Returns the value of the shares you buy can increase over time and when you also take dividends into account your return on investment can be better than other investments Income some shares pay dividends (income) along with franking or imputation credits (more on these later)

31 More benefits Easy to buy and sell you can buy and sell either by accessing your broker website or picking up the phone. You can liquidate your assets at very short notice if you need cash for any reason Low costs costs to buy and sell, especially if you use an online broker are minimal

32 More benefits Personal satisfaction if you are inclined to, you can manage your own share portfolio, which may provide you an interest in retirement to replace your paid work. There is so much information available to help you learn about shares.

33 Shareholder Rights As a shareholder you are part owner of the business and you are entitled to certain rights. These include: Attending AGM s and being kept informed Receiving dividends Participating in corporate actions Let s look at these in more detail.

34 Annual General Meetings Annual General Meetings (AGMs) are held once a year. It is here that shareholders make decisions on: electing new directors director remuneration other company business.

35 Annual General Meetings You can choose to attend in person if this is practical, or your vote can be counted by returning a voting form to a proxy. (Your proxy could be the ASA!) Investors consider an AGM as a good opportunity to both have their say and to hear what senior management has to say.

36 Reports & Announcements Reading about the company financials is a good way for investors to keep on top of the company performance and future growth prospects. You can choose to receive annual reports in either a full or condensed version and either in hardcopy or soft copy format. You should receive notification of significant announcements that could effect the company's share price. This is normally done via an subscription.

37 Dividends Dividends are usually paid to shareholders by a company twice a year from the profits they have made. Depending on the company, some dividends come with imputation or franking credits attached. As the company who is paying the dividend has already paid tax on the profits, imputation or franking credits are a way of compensating shareholders for the tax already paid.

38 Dividend Reinvestment As shareholders of some companies you can choose to receive your dividends as additional shares. This is called a dividend reinvestment plan and is sometimes offered at a discounted share price. You (or your accountant) will have to calculate the cost base for capital gains purposes for each small parcel of shares that you receive as part of a dividend reinvestment plan. Be aware that you will need to keep excellent records if you choose to participate in DRP's.

39 Corporate Actions As a shareholder you are entitled to participate in any corporate actions that the company may raise. These could include: Share issues Share buybacks Mergers Demergers

40 Types of Shares Ordinary shares A & B Class shares Preference shares Convertible Preference shares Contributing shares Company issued options

41 Ordinary Shares Generally, when investors talk about shares, you can assume that they mean ordinary shares. Ordinary shares are the most common type of shares and the full name is fully paid ordinary share or FPO. You may see this abbreviation after the name of the share when you search on your broker s website.

42 A & B Class Shares With some company s there can be two classes of share and usually they are called A and B. Generally, the different classes come with different voting rights. As an investor it is important to know what class of shares you are buying when you make an investment in a stock.

43 Preference Shares Preference shares are generally superior to an ordinary share in some way, usually because they have first preference or right to a dividend. Preference shares generally don t have voting rights. Some preference shares are convertible, that is, they can be converted to ordinary shares at some stage in the future.

44 Contributing Shares Contributing shares are also known as partly paid shares. These shares are usually issued, such that part of the price that is payable immediately and a balance is then due by an instalment, or instalments payable at a future date. Contributing shares can be bought and sold on the ASX like any other share, with the future amount owing being carried over to the new owner.

45 Contributing Shares In the past, a number of investors and traders were caught out when they bought shares in a company that had dramatically fallen in value to less than a cent, hoping to make a quick profit. Unfortunately the shares they bought had a $1 instalment due within a short time frame. A lot of people faced financial ruin because of the large numbers of shares they had bought. This clearly brings home the message that it is imperative that you know exactly what it is you are buying.

46 Company Issued Options Company issued options are options issued by the company that give the holder the right to acquire a certain number of fully paid ordinary shares at a stipulated price at any time in the future up to the expiry date. While a company issued option can be listed on the exchange, it does differ slightly from other options you may see. If you exercise the company option, new shares are issued and the company collects the full agreed price of the share from the option holder.

47 ASX Sectors Identify top performers Listed companies on the stock market are sorted by industry group or sector. Generally, a group of stocks within a sector tend to move together because companies within the same industry group are affected in similar ways by market and economic conditions. Experienced investors like to look at top performing sectors to narrow down their investment choices.

48 Identifying top performing sectors? Each sector can be charted in the same way an ordinary stock can and technical analysis studies can be made of the sector index charts. By reviewing these charts investors can identify better performing sectors and by focusing their research and attention in these areas, theoretically, identify opportunities with a better chance of success than selecting from the broader market.

49 Sectors to manage portfolio risk? Having an understanding of the sectors can help you to manage your portfolio risk as well. Ensuring that you are suitably diversified across sectors also helps smooth returns and mitigate against the risk of one sector falling heavily and doing serious damage to your portfolio returns.

50 List of ASX Sectors The following is a list of the codes and sector names for you to use when you are searching for charts or researching sector performance: Code XDJ XEJ XFJ XHJ XNJ XIJ XMJ XSJ XTJ XUJ Sector Name Consumer Discretionary Energy Financials Health Care Industrials Information Technology Materials Consumer Staples Telecommunications Utilities

51 ASA Learning To find out about other learning resources available to investors, explore the ASA s Investor Education Pathway