If you plan to invest in the share market, you will be relying predominantly on the business activities of major public companies listed on the stock exchange for income and capital growth. As these companies are in business to maximise profits; the more profitable they become the greater the chance shareholders will come out in front.
The Benefits
There are many benefits to be gained from this category of investment that may appeal to you. The major ones are mentioned below.
Income and Capital Growth
Public companies listed on the stock exchange normally pay their shareholders two dividends each year, an interim dividend and final dividend. This is great news if you are seeking a regular income flow.
As shares (stocks) have the capacity to increase in value; it is possible for you to make a profit on sale. You will generally find capital growth is primarily dependent on a company’s capacity to continually grow its business. The more profit it makes the greater the chance your annual dividend payments will increase.
Highly Liquid
Shares can be sold within a matter of minutes of contacting a stock broker or instantly if you do the transaction on-line. And you will ordinarily get your money back within a few days of selling them. As share prices are published daily, you can make a quick profit if your shares increase in value (or minimise losses if they decrease). You can also nominate the quantity of shares you wish to sell.
Minimal Entry and Exit Fees
The brokerage fees stock brokers charge in respect to buying and selling shares is minimal. On-line brokers normally charge around 0.4 per cent of the purchase and sale price.
No Holding Costs
There are no ongoing costs associated with owning shares (as is the case if you own real estate). This is great news if you happen to own a substantial share portfolio.
Tax Benefits
There is significant taxation benefits associated with investing in the share market that may appeal to you. Under Australian tax law:
- If you borrow money to buy shares in companies that pay dividends the interest payments is tax deductible.
- Unrealised capital gains are not liable to tax until the shares are sold.
- Capital losses can be offset against current and future capital gains.
- Shareholders are entitled to receive franking credits (or tax offsets).
- Expenditure you incur in deriving your assessable income (for instance profits and dividends) may qualify as a tax deductible expense.
- If a non-resident of Australia makes a capital gain from investing in shares listed on the Australian Securities Exchange; the gains are not ordinarily liable to tax. Dividend payments are liable to dividend withholding tax.
Record Keeping
When you buy and sell shares your stock broker will issue a buy contact note and sell contract note that will conveniently summarise your share transactions. These documents can be used to quickly calculate whether you had made a profit or loss.
The Risks
Share prices fluctuate daily in line with the prevailing market which may not appeal to you (especially if you see your shares fall in value).
There are three major risks associated with investing in the share market that you will need to be aware of.
- Decrease in value: You can lose a substantial sum if your share portfolio were to fall in value. And there is no guarantee they will recover or that you will get back your initial outlay. This means you will need to constantly monitor your share portfolio, and weed out companies that are not performing to your satisfaction.
- No Dividend Payments: The payment of a dividend is at the discretion of the company directors. There is a risk if a company’s business activities were to decline that dividend payments could fall or cease.
- Liquidation: There is a risk a company could become insolvent and cease trading. If this happens shareholders will rank last in terms of getting back their initial investment. And there is no guarantee you will receive a payment.
To limit your exposure to potential poor performance it pays to invest in quality blue chip companies that are trading profitably over a long period of time.
For more information you can read my article: How to Build a Share Portfolio: Investing in the Stock Market.
Jimmy Prince - Jimmy Prince is a fellow of CPA Australia and a tax specialist. He is a former lecturer and tutor in income tax law at LaTrobe University, ...
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