Understanding Share Investments

The Basics of Investing in Shares for Australian Households

Aug 9, 2009 Wei Yin Wong

The main types of share investments for Australian families are Australian listed shares, unlisted shares, international listed shares and share-based managed funds.

The sharemarket is a great place for families to build long-term wealth. In fact, many Australian households are already avid share investors. While it’s true that investing in shares comes with great risks as share prices may rise or plummet without warning, it does have some unmatched benefits as long as investors are armed with smart investment knowledge and keep abreast of financial news.

New to the sharemarket? Read what defines a share and discover the share investment options available to Australian households.

The Definition of Shares

According to James Dunn, co-author of Investing for Australians All-in-One for Dummies, (Wiley Publishing Australia, 2008), companies offer shares through the sharemarket to raise money for their operations while investors buy those shares to get dividends and capital growth.

“A share is a financial asset that the shareholders of a company own, as opposed to the real assets of the company – its land, buildings and the machines its workers use to produce goods and services. Tangible assets generate income; financial assets allocate that income,” he explains, adding that when an investor buys a share, he’s actually buying a share of a future flow of profits.

A share, Dunn writes, is also a right to part-ownership. This means the shareholder owns a slice of that company proportionate to the shares owned.

Australian Listed Shares

These are the most commonly invested shares. They are listed on the Australian Stock Exchange and issued by big companies such as Telstra, Westpac, Coles and Qantas. Justine Davies, a financial planner and author of How to Afford a Husband [ABC Books, 2009], cautions against buying shares based on advice from family and friends or reading hot tips from the newspaper. These investors often eagerly buy a particular share only to see it decrease in value after a short while.

“They panic, pull their money out and label shares as a ‘risky investment’. Anything would be risky based on that type of investment strategy!” she says.

Potential shareholders can also look into buying Australian listed shares that pay a franked dividend. This means the shareholders enjoy a tax rebate for the dividends that receive when the company paying the dividends has already paid tax on the money.

Unlisted Shares

Sometimes there may be opportunities to invest in unlisted shares. The most common type of unlisted share is the kind offered by the company that someone works for. Again, buying an unlisted share is buying small part of the company. And because it’s not listed, getting professional money advice on buying such a share may be harder, says Davies.

However, buying unlisted shares can be viewed as a sign of commitment to the company and its business as well as a way to get management influence, explains Davies. Assess how the management works and look into the dividend prospects and future growth of the business before investing in any unlisted share.

International Shares

Australian households can also buy shares listed on international sharemarkets, giving them exposure to giant global companies. Again, dividends and capital growth are the returns to expect. However, currency fluctuation is a big issue when investing in international shares. A stronger Australian dollar can reduce the value of overseas share investments while a weaker Australian dollar will enhance the value.

Share-based Managed Funds

These funds pool money from several investors to buy shares. Share-based managed funds are a good way of getting into the sharemarket as investors benefit from the use of experienced fund managers and have the avenue to buy a diverse range of shares.

To invest in shares, start with understanding the major types of share investments. Options for Australian families include Australian listed shares, unlisted shares, international shares and share-based managed funds.

Found this article useful? Read also Understanding Cash Investments, Understanding Fixed-interest Investments and Understanding Property Investments.

Reference:

The Australian Securities Exchange Website – About Shares

The copyright of the article Understanding Share Investments in Family Finances is owned by Wei Yin Wong. Permission to republish Understanding Share Investments in print or online must be granted by the author in writing.

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