How do Australian shares work?
07 Mar 2013
By Shadforth Financial Group
Buying a share in a company listed on the Australian Stock Exchange (ASX) means that you are a part owner in that company. The more shares you buy the greater your level of ownership in the company. The return you get depends on how the company performs over time.
In very simple terms, if a company continues to increase its profit year on year, then its share price should increase and the amount you receive from the company as a dividend should tend to increase. Your return comes from the growth in the share price and the income you receive from the share during the time you own the share.
The Australian share market consists of approximately 1,800 listed companies and amongst those there are some great companies, but also some very ordinary companies that should be avoided at all costs. It should be noted that there are many great businesses that are not listed on the stock exchange that are privately owned.
The Australian share market is dominated by the largest 20 companies1 who make up approximately 94% of the ASX 2002. In other words, the other 180 largest companies in Australia only make up 6% of the ASX 200. As an example BHP Billiton alone in February 2013 had a market capitalisation of approximately $206 billion and represents nearly 20% of the Australian share market.
Investing in shares offers the following advantages:
- Dividend income tends to increase over time as companies increase their profits. This protects against the impact of inflation and provides a growing income stream.
- Dividends are often referred to as 'franked', which means that when they are paid to you, tax has already been paid on this sum at the company tax rate of 30%. For example, a fully franked dividend yield of 5% is equivalent to a fully taxable yield of 7.1%. In other words a fully franked yield of 5% in shares is equivalent to a 7.1% term deposit rate.
- Shares have the potential to provide capital growth over time.
The main disadvantages associated with investing in shares is that the value of the shares will go up and down and can fall, even to zero, and the company can go broke. As a share investor, you have control over the shares you buy and sell and benefit from the lower tax rates on long-term capital gains!
If you have any questions in relation to your share portfolio please don't hesitate to contact the Shadforth Financial Group.
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1 The largest 20 stocks in Australia in December 2012 consist of AMP, ANZ, Commonwealth Bank, Newcrest Mining, BHP Billiton, Westfield, National Australia Bank, Westpac, Rio Tinto, Brambles, CSL, Fosters, Macquarie Group, Origin Energy, QBE Insurance, Suncorp, , Telstra, Wesfarmers, Woolworths and Woodside
2 ASX 200 refers to the largest 200 shares listed on the Australian stock exchange by market capitalisation. This simply refers to a company's size. The market capitalisation is calculated by multiplying the number of shares by the current share price.