Shares are one of the most common ways Australians build wealth over the long term, but the basics don't always get explained clearly. This guide covers what a share is, how buying and selling works, and the benefits and risks that come with it.
Key Takeaways
- Shares represent part ownership in a company, and trades settle 2 business days after execution.
- Dividend yields typically range from 2% to 4% for growth-focused companies, and 6% to 8% for more established ones.
- The All Ordinaries Index tracks the 500 largest companies listed on the ASX, one of several benchmarks used to measure share performance.
What Are Shares?
Shares represent your part ownership (or share) in a business.
Companies can raise money to finance their business by going public. Going public means being listed on a stock exchange and issuing shares to investors.
By paying for the shares, each investor buys part ownership of the company's business and becomes a shareholder in the company.
The money that a company raises in this way is called equity capital. Unlike debt capital which is borrowed money, equity capital does not need to be repaid, since it represents continuous ownership of the company.
How you make money as a shareholder
In return for investing in the company, shareholders can receive dividends and other benefits. A dividend is the distribution of a company's net profit to shareholders.
Shares that have been issued to investors by a listed company can be sold to other investors on the sharemarket. You make a profit when you sell your shares for more than you paid for them.
Common Types of Shares
Most shares issued in Australia are ordinary shares, which give shareholders voting rights and a share of any dividends, but rank behind other claims if a company is wound up.
Some companies also issue preference shares, which generally have priority over ordinary shareholders for dividends and in a wind-up, but usually come with limited or no voting rights. Preference share dividends are often set at a fixed rate, giving holders more certainty than ordinary shareholders, whose dividends depend on the company's performance and profits in a given year.
Most ASX-listed companies you'll come across as a beginner issue only ordinary shares, so this distinction matters more if you're considering a smaller or less conventional listing.
Buying and Selling Shares in Australia
Your adviser can buy and sell existing shares on your instruction on any business day on one of the recognised Australian securities exchanges (ASX or Cboe).
How trades are matched and settled
Orders to buy and sell shares are entered into a computerised trading system by your broking firm. Buy and sell orders are matched by price in the order they were entered into the system.
That way, every order is processed by price and on a first in, first served basis. Larger orders do not have any priority. A trade occurs whenever a buy order is matched with a sell order.
Trades are settled on the second business day after the trade takes place. This means ownership of the shares and related payments between the buyer's broker and the seller's broker are transferred on that day.
How share ownership is recorded
All Australian listed shares are registered electronically, either on the Clearing House Electronic Sub-register System (CHESS) operated by a subsidiary of the ASX Group, or on the company's own sub-register.
If you're just getting started and want a broader walkthrough of the process, read our guide on how to start investing in shares in Australia.
Buying New Shares: IPOs and Floats
Alternatively, you can buy new shares that are issued by companies from time to time by applying to participate in a float or initial public offering (IPO). Shares you buy through an IPO are registered as Issuer Sponsored Holdings, meaning your name sits directly on the company's own share register rather than through a broker. The price of shares issued in a float is generally specified in the prospectus, the formal document that sets out the offer's terms.
If you wish to buy shares in the float, you should first review the prospectus, then fill out the attached application form specifying the number of shares you wish to buy, and lodge it with your adviser before the application deadline.
Once new shares are issued and listed on a recognised Australian securities exchange, they may trade at a market price substantially different from the issue price, either higher or lower. This is due to supply and demand for the shares in the company.
How Share Performance Is Measured
Sharemarket indices represent the overall performance of companies listed on a stock exchange. Investors can use these indices to track how an investment is performing by watching its share price.
The key ASX indices
The key sharemarket indices in Australia are the Standard & Poor's (S&P)/Australian Securities Exchange (ASX) indices. These include the All Ordinaries Index (All Ords), a market capitalisation index, meaning it's weighted by the total value of each company's shares, comprising the 500 largest companies listed on the Australian Stock Exchange, and segments of the ASX, including:
- S&P/ASX20, designed to measure actively traded and highly liquid securities that are among the 20 largest securities listed on the ASX.
- S&P/ASX50, Australia’s most prominent large-cap equity index and is designed to represent 50 of the largest and most liquid stocks listed on the ASX by float-adjusted market capitalisation.
- S&P/ASX100, designed to measure the 100 largest index-eligible stocks listed on the ASX by float-adjusted market capitalisdation.
- S&P/ASX200, designed to measure the performance of the 200 largest index-eligible stocks listed on the ASX by float-adjusted market capitalisation.
- S&P/ASX300, designed to provide investors with broader exposure to the Australian equity market. The index is liquid and float-adjusted, and it measures up to 300 of Australia’s largest securities by float-adjusted market capitalisation.
Using dividend yield as a measure
Another way to track your shares' performance is to calculate the dividend yield, your annual dividend income shown as a percentage of what you paid for the shares, from your portfolio on an annual or more regular basis. This can be a more reliable measure, since share prices rise and fall daily, whereas dividend income is usually much steadier and often grows over time.
Benefits and Risks of Investing in Shares
Capital Growth
As a long-term investment, shares have the potential to provide better returns after tax than any other major investment. However, past performance is no guarantee of future returns.
Although share values have risen over the long-term, this has been punctuated with periods of short-term volatility, where prices can go up or down very quickly. For this reason, it is usually important to adopt a medium to long-term investment view of five years or more.
Dividend Income
Another benefit of being a shareholder is dividend income, although dividend yields vary greatly from company to company. Companies trying to grow their business might provide a low dividend yield, perhaps 2 to 4%, while more established companies might provide a higher dividend yield, potentially between 6 and 8%.
Tax Benefits
Shareholders have to pay capital gains tax on any net capital gains made by selling shares, but their income tax liability can be offset through dividends they receive with franking credits.
Franking credits pass on the value of any tax that a company has already paid on its profits. A company can pay a fully franked dividend if it has paid full corporate tax on the profits distributed as dividends. A partly franked dividend is paid if the balance of the franking account isn't sufficient to pay a fully franked dividend, and an unfranked dividend is declared where there's nothing in the franking account.
A company will advise shareholders of the status of the dividend at the time of payment. If you receive franked dividends, you must declare both the cash amount and any franking credits as assessable income in your tax return, and can then apply the franking credit amount to reduce your income tax liability.
Risks of Share Investing
Share prices of any company, even a blue chip, are always subject to change. Some investors fall into the trap of putting all their money into one asset class, usually at its peak, then watch as another asset class takes off without them. It's important to have a number of different shares in your portfolio to reduce the risk inherent in share investing.
Ready to Start Investing With Confidence?
Whether you're buying your first shares or refining an existing portfolio, a Morgans adviser can help you make informed decisions as part of your broader financial planning strategy, backed by expert research and personalised advice. Find a Morgans adviser to get started.
FAQs
What are shares?
Shares represent part ownership in a company. When you buy shares, you become a shareholder and own a portion of the business. Companies issue shares to raise equity capital, which doesn't need to be repaid like debt. Shareholders may receive dividends and can sell their shares on the sharemarket.
How do you buy and sell shares in Australia?
You can buy and sell shares through a licensed adviser on recognised Australian securities exchanges such as the ASX or Cboe. Orders are entered into a computerised trading system and matched by price on a first-in, first-served basis. Trades settle two business days after execution, and ownership is recorded electronically via CHESS or the company's sub-register.
What is an IPO or float?
An IPO, or initial public offering, is when a company issues new shares to the public for the first time. Investors apply by reviewing the prospectus, completing an application form, and lodging it before the deadline. Shares bought in an IPO are registered as Issuer Sponsored Holdings and may trade at different prices once listed, due to supply and demand.
How can you track share performance?
Share performance can be tracked using sharemarket indices like the S&P/ASX indices, such as the ASX200 or ASX300, or by monitoring share prices directly. Calculating dividend yield from your portfolio is another reliable measure, since dividend income tends to be steadier than daily price movements.
What are the risks and benefits of investing in shares?
Benefits include potential capital growth, dividend income, and tax advantages through franking credits. Risks include price volatility and the possibility of losses, especially if you invest in a single asset class. A medium to long-term view of five years or more, along with diversification, are both important for managing risk.
What's the difference between a stock and a share?
In Australia, the terms are generally used interchangeably. Some markets, like the US, use "stock" to describe ownership in a company broadly and "share" for a single unit of that ownership, but in everyday Australian use, both terms mean the same thing.
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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