What are shares? A share is a slice of ownership in a company, so buying one makes you part-owner of the business, and this guide covers how shares work, how they make money and what to watch for.
Key takeaways
- Share trades settle 2 business days after they're executed, when ownership and payments change hands.
- Dividend yields can range from about 2% to 4% for growth-focused companies and 6% to 8% for established ones.
- The All Ordinaries Index tracks the 500 largest companies listed on the ASX.
- A medium to long-term view of 5 years or more is usually important, given short-term price swings.
What are shares and how do they work?
Companies raise money by going public, which means listing on a stock exchange and issuing shares to investors. Each investor who pays for shares becomes a shareholder and owns part of the business.
The money raised is called equity capital. Unlike a loan, it doesn't have to be repaid, because it represents ongoing ownership.
How can you make money from shares?
There are two main ways:
- Dividends: a share of the company's net profit paid to shareholders. Amounts vary by company and year.
- Selling for more than you paid: you make a capital gain when the net sale price is higher than your total purchase price.
Past performance is no guarantee of future returns, and prices can fall as well as rise.
What are franking credits? They relate to the tax a company has already paid on its profits. If you receive franked dividends, you declare both the cash and the credits as income, and the credits can then reduce your tax bill.
Why do share prices move?
Share prices move with supply and demand. When more investors want to buy than sell, the price tends to rise. When more want to sell than buy, it tends to fall.
Company results, economic news and investor confidence all feed into that balance. That's why prices can change several times a day.
What's the difference between stock and shares?
In Australia, the two terms are generally used interchangeably. Some markets use "stock" for ownership in general and "share" for one unit of it.
What matters more is the type of share:
- Ordinary shares: carry voting rights and a share of dividends, but rank behind other claims if a company is wound up.
- Preference shares: usually have priority for dividends and in a wind-up, but limited or no voting rights.
Most ASX companies you'll meet as a beginner issue ordinary shares only.
How do you buy and sell shares in Australia?
- Your adviser or broker enters your order into a computerised trading system to execute the trade on the ASX or TMX, on any business day the market is open.
- Orders are matched by price, first in and first served. Larger orders don't get priority.
- The trade settles on the second business day.
- Your ownership is recorded electronically, either on the ASX's CHESS system or via a Security Reference Number (SRN) on the company's own register.
What about new shares? A company can also issue shares through an initial public offering (IPO), sometimes called a float. You read the prospectus, which is the formal document setting out the offer, then lodge an application before the deadline. Those shares are held on the company's own register, and they can trade above or below the issue price once listed.
How do you track share performance?
- Share price: the simplest check, though it moves daily.
- Market indices: the S&P/ASX 200 measures the 200 largest index-eligible companies, and the ASX 300 widens that to up to 300.
- Dividend yield: your annual dividend income as a percentage of what you paid. It's often steadier than share prices.
Why watch yield as well as price? Share prices rise and fall daily, whereas dividend income is usually steadier and often grows over time. That's why some investors keep an eye on both.
What are the risks of investing in shares?
Share prices change, even for well-known companies, and you can lose money. Putting everything into one company or one asset class adds to the risk.
Your total collection of shares is called a share portfolio, and ways to spread risk across it include:
- Holding shares across different companies and industries.
- Mixing shares with other assets, such as cash and fixed income.
- Investing regularly over time rather than in one lump sum.
It's also one reason the usual guidance is a medium to long-term view of 5 years or more.
Ready to take a step? Our buy and sell shares service explains how your adviser places trades. Our guide on how to start investing in shares in Australia walks through the first purchase, and our guide to investing covers the wider picture.
Share investing sits best inside a bigger plan, and our financial planning service connects the two. If you'd rather start with a fund than individual companies, see how exchange traded funds work.
When you're ready to talk it through, find a Morgans adviser.
Frequently asked questions
What's the difference between a share and a stock?
In Australia, they're generally used interchangeably. Both mean part ownership in a company, so don't worry about the label.
How do shares make money?
Through dividends paid from company profits and through capital gains when you sell for more than you paid. Neither is certain, so spread your investments across several companies.
What is an IPO or float?
It's when a company issues new shares to the public for the first time. Read the prospectus and lodge your application before the deadline.
How long does it take to buy shares?
Trades settle 2 business days after they're made. Your adviser can walk you through timing for your first order.
Are shares risky?
Share prices can rise and fall quickly, and you can lose money. A 5-year-plus timeframe and a spread of holdings can help manage that risk.
This article contains general advice only and does not take into account your individual objectives, financial situation, or needs. You should consider whether this advice is appropriate for you and seek personal advice from a Morgans adviser before making any financial decisions.
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