Basics of Australian Share Market

Submitted by admin on Mon, 14/06/2021 - 05:45
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Basics of Australian Share Market

What is a Share?

If you bought a business in partnership with someone else and paid 50% the cost of acquiring the business and agreed to holding 50% of the power when making decisions and acquiring 50% of the revenue – that means you have a share in that business!

Similarly when you purchase a share on the Australian share market of a particular publicly listed company you gain part ownership of that company and also get part of the revenue of that company (dividends).

Why do businesses sell shares on the Australian Share Market?

The simplest reason is to raise money to finance the company’s growth. When a company is initially floated or listed on the share market (Initial Public Offering – IPO), the company is financing itself through equity capital as opposed to debt capital (borrowing from banks, private lenders etc.). The biggest benefit of equity capital is that the company does not have to pay back the money raised through IPO as the shareholders who have bought shares will continue to hold part ownership of the business for as long as they hold on to the shares.

What are the benefits to the Shareholder?

As a shareholder in a publicly listed company you have the ability to earn dividends, sell your shares if the value of the shares goes up to earn capital gains, be part of the decision making through voting at annual general meetings (AGMs) and receiving reports and detailed information about the company.

As a shareholder you may also receive special treatment if the company issues more shares or share buy-backs (the company may acquire the shares from you by offering a price).

What are the risks of being a Shareholder?

The biggest risk is connected to the performance of the company that you hold shares in. A company may fail altogether and the price of the shares may end up being $0!  This means you may lose all of your invested funds unless voluntary administrators can manage to salvage some funds and you may receive some part of those funds.

It should be noted that by choosing to buy shares you consent that you agree to the risks associated with the performance of the company and hence the share price.

The way to think about investing and managing the risks with share markets is to look at buying shares in companies that have a strong performance and may have been around for some years (proven track record). Timing can be everything when it comes getting it right – being lucky enough to buy at the IPO and holding onto the investment for the long run can really pay off.

Google’s IPO in 2004 offered $US85 price per share, today the price is near $US2,300 per share.

(Source: https://www.cnet.com/news/learning-from-googles-ipo/)

 

(Source: https://www.google.com/finance/)

 

Good investors always look at the medium to long-term strategy. Of course, you may choose to purchase shares and simply hold on to them until you want to liquidate those shares and pull out your cash from the share market but astute investors keep an eye on the news and speculations around the companies they have shares in and choose to sell the shares when they gain value and buy the shares when they drop in value.

Which shares should I buy?

It all depends on your intentions – are you in it for the long haul (having a safe investment for your retirement) or do you want to take the risk on a new offering and try to capitalise on the potential quick growth of the company or shares.

Also you may consider shares to compliment your existing income; in that case, you would be looking at shares that offer a greater after-tax dividend yield.

 In any case the capital growth of the shares is a must in order get high returns on your investments.

What types of shares are there?

Shares can be grouped into five types:

  1. Income Shares – pay an higher dividend and can be used to supplement existing income, however the price of such shares may not grow very rapidly
  2. Blue Chip Shares – are generally issued by well established businesses that have history in the industry and offer stability and growth potential.
  3. Growth Shares – these are offered by businesses that are emerging as fast growing companies as compared to existing businesses in that industry. Growth shares normally do not offer high paying dividends as the funds are used to finance the expansion of the business.
  4. Cyclic Shares – as the name suggests these shares are affected by the general economic conditions and rise and fall as the economy expands and contracts. Industries, such as, building, mining, automotive etc. are affected by the up and downs of the general condition of the economy.
  5. Defensive Shares – in the current climax of COVID-19 you may have noted that even though there is a general down turn in the economy but some industries as benefiting from the these conditions, such as, pharmaceuticals, food, insurance etc. Shares in these industries perform well during times of economic down turn.

Some examples of companies with defensive shares:

Company

Expected sales in 2021

Share price change over the past 12 months

Pfizer/BioNTech

$15bn-$30bn

Pfizer: +1.8%

BioNTech: +156%

Moderna

$18bn-$20bn

+372%

Johnson & Johnson

Adenovirus vaccine

up to $10bn

+7.7%

AstraZeneca

$2bn-$3bn

-8.6%

Sinovac

billions of dollars, but unclear

-21.6%

Novavax

‘several billion dollars’

+1,128%

CureVac

unclear – pricing not yet revealed, but priced at a profit

+45.5%

(Source: ‘From Pfizer to Moderna: who's making billions from Covid-19 vaccines?’ – TheGuradian.com)

What are the roles of a stockbroker?

When you decide to buy shares you will need the services of stockbroker to facilitate the transaction of buying or selling shares. When a company initially lists on the stock exchange (IPO) the shares can be purchased directly from the company, however after the initial listing all shares are bought and sold via stock broker.

In Australia, shares cannot be bought or sold directly on the Australian Securities Exchange.

What determines the price of shares?

Just like any other market, for example, property market; supply and demand determines the price of the asset – in our case the price of the share.

If a share is highly sought after the price goes up and when on one wants to buy the shares in a particular company the value of the shares go down. A well performing company that is has been established for some time and has a proven track record of taking good management decisions will be reflected in its share price – strong and stable.

What types of stockbrokers are there?

There are two types of stock brokers:

Advisory – these stockbrokers usually provide a complete service, i.e. the do their research on the share market and recommend what stocks to buy and which ones to sell. Obviously the price paid for advisory brokers is higher than that for non-advisory brokers.

Non-advisory – these brokers simply make the trade for you, that is, they simply sell or buy shares as per your request and hence usually charge a lower than that of advisory brokers.

 

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