Understanding shares

Before you buy your first share it is important that you know what is involved in being a shareholder. Here are a few explanations of sharemarket terms that might help you to understand what is involved as a shareholder.

Sharemarket

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

Shares and stocks

Shares are the smallest equal unit of ownership in a company. You can buy shares in publicly listed companies on the stock market by using a broker.

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 company.

Parcels and holdings

A parcel of shares is a distinct number of shares of one particular company that you purchase.

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.

Portfolio

Your portfolio is the total holdings of all the companies in which you own shares. Portfolio value is 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.

Investors and traders

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

Types of shares

  • Ordinary shares
  • A & B Class shares
  • Preference shares
  • Convertible Preference shares
  • Contributing shares
  • Company issued options

Benefits of shares

  • 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
  • Capital growth and 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
  • 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
  • Personal satisfaction – if you are inclined to, you can manage your own share portfolio, which may provide you with an interest in retirement to replace your paid work.

Risks

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

Shareholder rights

  • Annual general meetings (AGMs) - as a shareholder you have the right to vote at AGMs which are held once a year. At an AGM shareholders make decisions on electing new directors, director remuneration and on other significant company business. You can choose to attend an AGM in person or you can vote via proxy by completing a proxy form. The ASA monitors the performance and governance of listed companies and is focused on advancing and protecting the interests of retail shareholders. You can give the ASA your proxy vote for any or all of your shareholdings. votes proxies on behalf of its members.
  • Reports and announcements - the company has an obligation to report on the financial state of the company annually and you can choose to receive annual reports in either hardcopy or softcopy format. You should also receive notification of significant announcements that could affect the company's share price.
  • Dividends - as a shareholder you have the right to receive dividends in proportion to the number of shares that you hold. Each company will have its own dividend policy and some companies will not pay a dividend at all.
  • Dividend reinvestment - companies that offer dividend reinvestment plans allow shareholders to automatically reinvest some or all of their dividends in new shares instead of receiving the dividend in cash.  Shares issued under a dividend reinvestment plan may be issued at a discount to their listed share price at the time of the dividend.
  • Corporate action - where appropriate and where eligible, shareholders can participate in various corporate actions. Read more detail about corporate actions here.