Shares

A stake in the business

Investing in shares will make you part-owner of a business. Shares can be a sound long-term investment but are very risky to use in the hope of making a quick buck.

Before you invest in shares, you should understand the benefits and risks. There are different ways to invest in shares - each has pros and cons. 

Benefits of investing in shares

The benefits of investing in shares are:

  • Potential capital gains from owning an asset that can grow in value over time
  • Potential income from dividends
  • Lower tax rates on long-term capital gains

Video: Luke invests in shares

How I started investing video

Find out how school teacher Luke starts investing in the stockmarket in this MoneySmart Teaching video.

Risks of investing in shares

The risks of investing in shares are:

  • Share prices for a company can fall dramatically, even to zero
  • If the company goes broke, you are the last in line to be paid, so you may not get your money back
  • The value of your shares will go up and down from month to month, and the dividend may vary

Different ways to invest in shares

There are many ways you can invest in shares. Each method has pros and cons. Decide which best suits your needs. Shares may also be referred to as stocks, securities or equities.

If you are new to shares, you might like to try the ASX's free online shares course.

Buying shares on a share exchange

There are five public share exchanges in Australia. Four of them directly supervise the companies that issue the shares that trade on their markets. The fifth exchange, Chi-X, currently only provides the infrastructure for trading shares already quoted on the ASX. 

The five exchanges are:

Buying shares on the ASX or Chi-X

While Chi-X commenced on 31 October 2011, your broker may continue to buy ASX-quoted shares only on the ASX until 1 March 2013. After that date your broker must consider whether they can achieve a better outcome for you by trading on Chi-X.

As there are now two markets to choose from when you trade ASX-quoted shares, once your broker joins and trades on Chi-X they must provide the best execution for your trade across both markets, in terms of best outcome (e.g. price). Your broker should send you their best execution policy. If you have not received it you can:

  • Ask your broker to provide their best execution policy to you
  • Look for the best execution policy on your broker's website

You can also ask your broker to demonstrate they have complied with their best execution policy on your trade. 

If your trade is executed on both the ASX and Chi-X, you can ask your broker for a single trade confirmation that takes into account orders executed across both of these markets.

You should also ask your broker whether they are using dark pools or internalising your trades and decide whether you would prefer them to be executed on the ASX or Chi-X. 

Complaints

If you are not happy with how your trade has been executed you should complain to your broker. Details of how to do this will be on their website. You can also complain to the Financial Services Ombudsman.

Buying individual shares directly

You can buy individual shares through a full service broker, an online trading account or from the company itself when it offers shares through a public float. You have control over the shares you buy and sell. However you must be prepared to put in the time and effort to track their performance and watch the market to make your own buy or sell decisions. For more information, see how to buy and sell shares.

Buying shares via a Listed Investment Company (LIC)

A listed investment company uses money from investors like you to invest in a range of companies and other assets. It pays you dividends from its earnings and hopefully its shares increase in value over time. They have lower ongoing costs than managed funds but are less suitable if you are investing small amounts regularly, due to the stock broking fees on each contribution. An LIC's share price may not exactly reflect the value of its investments.

Buying shares via an Exchange Traded Fund (ETF)

An Exchange Traded Fund (ETF) invests in a basket of shares that make up an index e.g. the ASX200 Index. An ETF allows you to diversify your portfolio without having a large amount of money to invest. You can buy or sell ETFs just like any other share. They generally have lower ongoing costs than managed funds. But they are less suitable if you are investing small amounts regularly, due to a stock broking fee on each contribution.

Buying shares via an index managed fund

An index managed fund is a type of managed fund that buys shares to mirror a particular share market index. For example, an Australian shares index fund invests in a wide range of companies and property trusts listed on the ASX and aims to match the return of the ASX300 index. You gain a diversified portfolio and pay lower management fees than an active managed fund. See managed funds for more information and compare offers with our managed funds calculator.

Managed funds calculator

Buying shares via an active managed fund

When you invest in a managed fund, your money is pooled together with those of other investors. A professional fund manager then buys shares and other assets on your behalf and tries to outperform the market. This is a convenient way to buy shares where someone else is responsible for the buy and sell decisions, but watch out for the fees charged by the fund manager. See managed funds for more information and compare offers with our managed funds calculator.

Buying shares via an employee share scheme

Employee share schemes give employees shares in the company they work for, or the opportunity to buy shares in the company. The shares might be offered without a brokerage fee or at a discount to the market price. Employee share schemes can be a great way of gaining access to discount shares, however you should carefully read the terms and conditions set out in the offer documents as there may be restrictions on when you can buy, sell and access the shares. See employee share schemes for more information. 

Buying shares is a good way to build your wealth over time. As with other investment options, shares are not without their risks. Think carefully about your options and seek financial advice before you enter the share market.


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Last updated: 15 Apr 2014

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