Getting Started in Shares For Dummies Australia. Dunn James

The unique qualities of shares or stocks (the terms mean the same thing in Australia) as financial assets make the sharemarket the best and most reliable long-term generator of personal wealth available to investors.

      Since 1900, according to AMP Capital, Australian shares have earned a return of approximately 11.9 per cent a year, split fairly evenly between capital growth and dividend income, for a real (after-inflation) return of 7.8 per cent a year (which is almost double the return from bonds). Since 1950, according to research house Andex Charts, the All Ordinaries Accumulation Index (which assumes all dividends are reinvested) has delivered an average return of 12.0 per cent a year, for a real return of 6.9 per cent a year. In the 30 years to 30 June 2015, says Andex Charts, the same index has earned 10.8 per cent a year, for a real return of 7.3 per cent a year.

      In 1985, according to the Australian Securities Exchange (ASX), the Australian stock market was valued at $76 billion, about one-third of Australia’s Gross Domestic Product (GDP: The amount of goods and services produced in the Australian economy). In mid-2015, the stock market was valued at $1,700 billion, while GDP was about $2,000 billion. Although the nation’s economic output has grown almost nine times since 1985, the value of the stock market has grown by more than 22 times.

      Investing is about building wealth for yourself so that you can have the lifestyle you want, educate and give your children a good start in life, and ensure that you have a well-funded, carefree retirement.

      When you invest in shares, you get a number of advantages, such as:

      

The opportunity to buy a part of a company for a small outlay of cash.

      

A share of the company’s profits through the payment of dividends (a portion of company profits distributed to investors).

      

The company’s retained earnings working for you as well.

      

The possibility of capital gains as the price rises over time.

      

An easy way to buy and sell assets.

      

The sharemarket is unbeatable as a place for individuals to build long-term wealth. Shares can provide long-term capital growth as well as an income through dividends: More than half of the long-term return from the sharemarket comes from dividends.

The GFC dents Australians’ love of the sharemarket

      Australia is second only to the US as the world’s leading share-owning democracy. But with the global financial crisis (GFC) souring many investors’ experiences with shares, ownership had fallen to 36 per cent (33 per cent direct) by late 2014. According to the 2014 ASX Share Ownership Study, total share ownership (including retail managed funds) in Australia now stands at 36 per cent of the adult population, meaning that about 6.5 million people own shares. About 5.9 million Australians – 33 per cent of the adult population – own shares in their own right. According to the ASX’s numbers, retail investors (as in households) own 13 per cent of the Australian sharemarket by value – about $220 billion worth of shares – and account for 14 per cent of trade by value, 51 per cent of trade by volume of shares and 12 per cent of the number of trades. In addition, in 2014, investment bank Credit Suisse estimated that self-managed super funds (SMSFs) own 16 per cent of the sharemarket.

      The 2014 ASX Share Ownership Study also points out that 13 per cent of Australian share owners own shares listed on other exchanges (up from 7 per cent in 2002, but down from a peak of 19 per cent in 2006).

      Australian share ownership rose dramatically between 1991 and 2004; in 1991, only 9.9 per cent of the adult population owned shares and total Australian share ownership (including retail managed funds) stood at only 21.8 per cent. Perhaps the memories of the 1987 sharemarket crash and the 1990–1991 recession were too vivid for Australians to trust the sharemarket back then. But two major factors sent the Australian shareholder population booming in the 1990s.

      The first was a wave of privatisations, in which government-owned businesses were sold through the sharemarket. Prominent among these were Telstra, the Commonwealth Bank, Qantas, CSL and the former Totalisator Agency Boards of New South Wales, Victoria and Queensland.

      The second was a succession of demutualisations, in which mutually owned insurers and cooperatives converted their structure to share-based companies and listed on the sharemarket. In this way, AMP, National Mutual (which then became AXA Asia–Pacific, which merged its Australian business with AMP in March 2011 and sold its Asian business to the French parent, AXA), the NRMA (now Insurance Australia Group) and even the ASX itself joined the sharemarket. Both AMP and Telstra brought more than one million first-time investors to the sharemarket.

      By 1999, 54 per cent of Australian adults owned shares (41 per cent direct), but this fell to 50 per cent (37 per cent direct) by 2002, in the aftermath of the 2000 ‘tech crash’. The recovery from that slump saw share ownership rise again, to 55 per cent (44 per cent direct) by 2004, making Australia then the world leader.

      Thirty-eight per cent of adult males were direct share owners in 2014, down from 40 per cent in 2008. But the proportion of women who were direct share owners fell from 30 per cent in 2008 to 27 per cent in 2014.

      The likelihood of share ownership increases with age: The peak level of share ownership is the 75+ age group. People with higher incomes are also more likely to own shares; almost half those earning more than $100,000 a year own shares.

      The sharemarket has an exaggerated reputation as a sort of Wild West for money and therefore it can be a daunting place for a new investor. The sharemarket is a huge and impersonal financial institution; yet paradoxically, it’s also a market that’s alive with every human emotion – greed and fear, hope and defeat, elation and despair. The sharemarket can be a trap for fools or a place to create enormous wealth. Those who work in the industry see daily the best and worst of human behaviour. And you thought the sharemarket was simply a market in which shares were bought and sold!

      The sharemarket is precisely that: A place for buying and selling shares. Approximately $4.4 billion worth of shares change hands every trading day. Shares are revalued in price every minute, reacting to supply, demand, news and sentiment, or the way that investors collectively feel about the likely direction of the market. The sharemarket also works to mobilise your money and channel your hard-earned funds to the companies that put those funds at risk for the possibility of gain. That ever-present element of risk, which can’t be neutralised, makes the sharemarket a dangerous place for the unwary. Although you take a risk with any kind of investment, being forearmed with sound knowledge of what you’re getting into and forewarned about potential traps are absolutely essential for your survival in the market.

      Finding Out What a Share Is

      Companies divide their capital into millions (sometimes billions) of units known as shares. Each share is a unit of ownership in the company, in its assets and in its profits. Companies issue shares through the sharemarket to raise funds for their operating needs; investors buy those shares, expecting capital gains and dividends. If the company fails, a share is also an entitlement to a portion of whatever assets remain after all the company’s liabilities are paid. The following is a partial list of share definitions.

      A share is

      

Technically a loan to a company, although the loan is never repaid. The loan is borrowed permanently – like the car keys, if you have teenagers.

      

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 and equipment that its workers use to produce goods