A share is a small portion of the ownership of a business. If you own 10% of the shares in a business, it suggests that you own 10% of that company. This entitles you to 10% of the votes when a big decision needs to be made, and an equal proportion of the profits when they are distributed.
The most common way for Australians to buy shares is via the sharemarket. In Economics a market is where buyers and sellers get together to determine prices for exchanges – in the sharemarket it is part ownership of companies that is changing hands. You should note that only publicly listed companies will sell their shares in this way. In Australia there are many more private companies than there are listed companies; anyone can start a private company by registering the company name with the Australian Securities and Investment Commission (ASIC) and paying the necessary fees.
Unlike property, the market for shares is relatively easy to enter. For as little as $1,000 some share brokers will allow you to buy into a share fund. This is when money from a variety of investors is pooled and used to buy shares on behalf of everyone in the group. It is possible to buy into share funds for Australia shares, international shares, or in any one of hundreds of specialty markets (emerging markets, Asian companies only, environmentally friendly companies only and so on).
When you purchase a share, it is possible to generate passive income through the receipt of dividends. A dividend exists when the profits of a company are shared out amongst the owners. While some money will be reinvested in the business, most will be split up based on the percentage of the business owned by each person. It is also possible to generate a capital gain through the purchase of shares. To achieve this, all you need to do is sell the shares for a higher price than you paid.
And this is where the major disadvantage associated with shares comes in. The price of shares can vary, and many people fear buying the “wrong” share. When this happens, the price of the share will fall, and the investor could end up making a loss. As a result, many people argue that it is necessary to have a great deal of specialist knowledge before buying into the sharemarket. If you do not have this knowledge, then you could end up paying higher fees than necessary when working through a managed fund. It can also be quite unsettling to see the value of your investment change every day – things look good when the value is increasing, but seeing the value fall can require nerves of steel!
It is also worth noting that people who borrow to purchase shares are always fearful of the possibility of a margin call. A margin call exists when the price of the shares falls to such a level that the bank would like to get some of the borrowed money back before it would normally be due in the life of the loan. For some investors, this can mean selling their shares, repaying part of the loan, and being left with a debt.
The most common way for Australians to buy shares is via the sharemarket. In Economics a market is where buyers and sellers get together to determine prices for exchanges – in the sharemarket it is part ownership of companies that is changing hands. You should note that only publicly listed companies will sell their shares in this way. In Australia there are many more private companies than there are listed companies; anyone can start a private company by registering the company name with the Australian Securities and Investment Commission (ASIC) and paying the necessary fees.