Risk and reward are closely related; if you want a higher profit, you need to accept that a higher risk will be involved.
Most companies aim to make a profit from the sale of a product or service.
While many types of legal business structures are possible in Australia, the main structure applicable to shares is the limited company. If the shares are listed on an exchange, they can be purchased by anyone so this type of company is also known as a public company.
Chapter 2 Getting into shares
In this chapter, I discuss some of the basics about investing in shares, starting with some common terms you're likely to encounter. I then look at the different ways you can come to own shares and so become a share investor, and consider shares you can invest in as well as those you can't. I also explain why share prices change and the most commonly quoted prices. This will set the groundwork so you have a good foundation to work from as you get more into shares.
What are shares?
As discussed in chapter 1, shareholders are the owners of a company and, as the name suggests, a share is one unit of ownership. This means that someone with 10 000 shares owns a 10 times greater slice than someone with 1000 shares. As part‐owners, shareholders are entitled to a share of the assets and profits of the business. They're also entitled to other benefits of ownership in a business enterprise, including having a say in the management of the business by attending annual general meetings (AGMs), asking questions and voting. Because a shareholder has equity in the business, shares are also called equities.
‘Whoopee! I'm now a part owner of ACME LTD.’
Understanding some basics
The following are some common terms you're likely to encounter as you start investing in shares. Some of them are a bit ‘jargony’, but understanding them is necessary as you progress along your journey.
Common share investing terms include:
Bulls and bears: These terms have been around for a long time and no‐one is exactly sure how they came about. Bulls are optimists who believe the market will rise and, therefore, they want to buy shares, whereas bears are pessimists who believe the market will fall and, therefore, want to sell shares.
Capital: This is just a fancy word for money used in business.
Portfolio: Your portfolio is the total of the shares you own. Your portfolio value changes as share prices change, so you can know its value only at a certain point in time. Your portfolio value also changes if the number of shares changes. The value rises if you add more shares and falls if you sell some of the shares you currently own.
Securities: A security is a tradeable financial asset. Because shares have value and are tradeable, shares are one form of security. Many other types of security are available, including property, bonds and cash.
Securities exchange: Shares are traded on a securities exchange (previously known as a stock exchange). Before a company can be listed with an exchange (and in order to remain listed) the company needs to satisfy stringent requirements of the exchange, the Australian Tax Office (ATO) and Australian financial laws that are enforced by ASIC (Australian Securities and Investments Commission). If the company can jump through these hoops, and pay the required fees, it can be listed with the exchange and traded on their market. The company is now a listed public company. (I discuss this process in a little more detail in the section ‘Making shares available for trading’, later in this chapter.)
Share registry: Most listed companies in Australia can't be bothered keeping track of the details of all their shareholders, because it's fiddley work and isn't really part of the business strengths of the company. So companies usually farm the shareholder work out to a share registry. This is an organisation set up to do precisely that — keep records of the details of all shareholders and their shareholding. Australia has several share registries, of which the most widely used ones are Computershare and Link Market Services. You can easily find out which share registry the company uses because it will be stated on any shareholder communication you receive.
Stocks: This is just another name for shares and is often used to mean the total of the shares owned in a company. Don't get confused with ‘stock’, which refers to goods kept on hand by the business — that is, the materials or partly finished or finished products owned by a business. In this book, I mostly use the word ‘shares’ but sometimes I use ‘stock’, particularly when referring to all the shares in a company.
Stockmarket: The trading market for shares is, naturally enough, known as the stockmarket or sharemarket. In Australia, the largest market is the Australian Securities Exchange (ASX) and it is most likely the one you'll use, but a number of smaller exchanges are also in operation.
Trading: Trading is the process of purchasing or selling shares.
Trading hours: As you might expect, an exchange isn't open for trading on a 24/7 basis. In Australia, the opening hours are 10 am to 4 pm, Monday to Friday, with the exchange closed on public holidays. Nowadays, you can place orders with many brokers outside of exchange trading hours but the order can't transact until the exchange is open for trading.
Tip
If you have any queries related to your shareholding or your dividend payments, trying to contact the company is pointless. Instead you need to contact the share registry or your broker, so keeping track of the share registry used by each of the companies you own shares in is worthwhile.
Traders and investors
Many people think the terms traders and investors have virtually the same meaning, but actually they're quite different. A share trader usually buys or sells shares with the purpose of making a profit from the trades, so they don't hang on to shares for too long. In fact, a class of traders known as day traders aim to buy and sell the same shares on the same day so no positions are held overnight.
Generally traders make a profit by selling shares for more than they originally paid for them. Traders usually choose shares that are volatile — that is, their price rises and falls a lot in a relatively short period of time. These shares are the most risky and are usually shares issued by small businesses such as small mining companies or small biotechs and technology companies. These are also known as speculative shares or speckies.
Investors, on the other hand, buy shares and hold them for a reasonable period of time. If you're a share investor, you aim to put your spare cash to work to earn you a higher return than you could get from a bank account or similar type of investment. This is especially important in today's investing climate where interest rates are at a historical low. Investors usually purchase shares in larger businesses with a stable history of long‐term profitability. These are also known as blue chip or green chip shares and they're inherently less risky.
Tip
Being successful as a full‐time share trader is very difficult, so if you plan to give up your day job and become a professional share trader I suggest you think again. This book is written primarily for investors, so I won't really get into the finer aspects of trading shares for profit. Naturally, investors still need to be able to buy and sell shares and I explain how to do this in later chapters.
Making shares available