Monday, March 26, 2007
Sink or Float?
For those who are new to share investing, let's take a look at some basics...
The most commonly traded share is called (surprise!) an Ordinary Share. When you buy a share in a company you own a portion of that company - and as a part owner (albeit a small one) you are entitled to a percentage of the profits (albeit a small one) which you receive in the form of a dividend.
And/or the company may choose to reinvest profits in the expansion of the company, the value of the company's shares may rise, and you would benefit by a capital gain.
Dividends are normally paid twice a year and can be franked, unfranked or fully franked.
Franked means that the dividend carries a tax credit to avoid double taxation - the idea being that profits on which the company has already paid tax, should not be taxed again when distributed to shareholders.
But the capital gain from owning shares can be much more valuable than the dividend income they provide.
You can't buy shares in just any old company - only public companies that are listed on the stock exchange. Many companies are private; their shares are not available to the public to purchase. Public companies - being accountable to the shareholding public - have much more onerous disclosure requirements than private companies. Basically, they are required by law to let the public know what is going on within the company.
For example, the company is obliged to hold an Annual General Meeting (AGM) open to all shareholders to attend, and to supply an Annual Report to shareholders on the activities and financial situation of the company.
Say we have a private company that's doing quite well and needs an injection of capital (cash) in order to expand further. Such a company has a couple of options.
One is to borrow the money - but then there is an interest cost.
An alternative is to sell part of the company. When shares in the company are offered to the public, it's called "floating" the company. Companies float to raise capital for expansion.
Before floating, the company must present a prospectus to the Australian Securities and Investments Commission disclosing enough information to allow the public to make an informed decision about whether to invest.
Investors can then apply to purchase shares of this "initial public offering" (IPO). This sale is said to occur on the primary market - investors pay their money and the newly public company receives it.
These shares can then be resold on the secondary market where the shares are both bought and sold by members of the public - investors pay money for the shares and other investors receive it.
All this buying and selling is regulated by the Australian Stock Exchange. The ASX electronically matches up the buying and selling orders and otherwise administers the exchange of shares.
The price of the shares now rises and falls depending on what buyers and sellers can agree on. If buyers are more desperate than sellers they will pay more and the price will rise. If sellers are more desperate than buyers they will accept less and the price will fall.
This is a very important point - it's the public perception of the value of the shares that sets their price, NOT the performance of the company directly.
There are many examples of leading companies with a strong market position, good earnings, sound finances and healthy dividends, whose share price nevertheless falls. And of companies with no track record, little in the way of physical assets, not making money, whose share prices go through the roof (the words "dot com boom" spring to mind).
To further your stock market education, did you know that you can take online classes from the ASX - for free! Here's a list of currently available courses from their web site:
Getting started in shares
This class gives a short introduction to the world of shares. If you currently don't invest in the sharemarket or have limited involvement, then this is the place to learn more.
Starting in the sharemarket
Are you new to investing in the sharemarket? Then this class is the right choice for you, covering more material than the Getting started in shares online class. Starting in the sharemarket will give you a clear and simple introduction to investing in the Australian sharemarket. If you start with a solid knowledge base when entering the sharemarket you will have more control over your financial destiny.
Tracking your sharemarket investment
Being an informed investor means keeping track of what is going on in the financial world. Learn about the influences on the sharemarket and the basics of financial research including how to decipher a balance sheet and maintaining investment records.
Analysing and selecting shares
Equip yourself with the knowledge to perform the fundamental research and technical analysis required to select shares for your portfolio. Learn the concepts, strategies and tools necessary for researching potential investments. Understand the tools of fundamental analysis and how to examine charts for the trends that lie within.
Developing your investment portfolio
Successful investors have direction, discipline and a plan to help them meet their financial objectives. This class helps you to define the most appropriate strategies and asset allocation to suit your investment needs.