Klevah™ - All About Shares

All About Shares

Just some of the basics. Simply explained. Plain English.

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What Are Shares? Shareholders Dividends and Distributions

Franking Credits CGT Returns and Performance

Volatility Indices Index Funds

ETFs ETF Takeover Perceptions Back to Home

What Are Shares?

฿ Shares are partial ownership of a company. The more shares that you own in a company, the greater part of the company you own, making you entitled to more of everything that shares provide. This means greater Dividend or Distribution payments if the company chooses to pay them. These are income payments to shareholders that allow them to receive benefits from the company’s profits.

฿ A company that is improving its ability to make payments to shareholders in the future, can reward shareholders in terms of the increase in its share price. Its share price can rise in anticipation of possibly better future payouts even if they are a long way off. The price of the shares in a company can also fall, of course, if the prospects of the company seem at all worse than they were a moment before. In the short-term prices can move around seemingly at random. Any information that is publicly available about a company is theoretically reflected in its price. Any new information that comes along that is relevant to the company’s financial performance will quickly move the price if it is significant enough.

Shareholders

฿ Companies are generally run principally for the benefit of shareholders in return for the shareholders’ investments to set up and grow the company. The board of directors of the company are there to represent shareholders’ interests and appoint managers to run it for that purpose.

฿ New shareholders are deemed to have gained the right to be respected as much as founding investors. This is a principle that maintains the value of the shares and treats everyone equally. This website will also refer to having partial ownership of a fund as having shares in that fund if those units of ownership are available to be bought and sold on the share market.

฿ The share market is an electronic marketplace for the trading of shares. The last price that a trade occurred at is referred to as the current share price and can move around a lot from minute to minute while the market is operating. The Australian Stock Exchange (ASX) is the main market provider in Australia and is open between 10am and 4pm Sydney/Melbourne time on all business days. The word stock is interchangeable with the word share, such as buying stock, a stock market/stock exchange. A Stockbroker is usually referred to as a Financial Advisor these days. We are neither.

Dividends and Distributions

฿ Dividends and Distributions are the payments that companies or funds make to shareholders to reward them for their investment. Unlike fixed interest payments, there is no requirement about how much to pay or whether to pay them at all. Giving an income stream to investors is balanced against retaining money in the company, or fund, for further investment. A decision must be made by the management about what is in shareholders’ best interests. Income from shares is one of their most desirable aspects but the amount paid is not consistent or reliable.

฿ Caution is needed when searching for reliable passive income. The payments from the company (or fund) will incur tax consequences through Income Tax and possibly Capital Gains Tax. Capital Gains Tax will be applied to any sale of shares at a gain. Shares that are not sold do not incur Capital Gains Tax yet, making holding on to shares for the long run and enjoying the benefits of passive income, a tax efficient way to invest. This website does not give tax nor financial advice. Some Capital Gains Tax can be applied to some payouts by companies and funds, however. With these payments shareholders may also receive Franking Credits.

Franking Credits

฿ Franking Credits (or Imputation Credits) are a mechanism to avoid shareholders being taxed twice on their income from the companies they invest in. It applies in Australia to companies that operate, and pay Company Tax, in Australia. If a company was taxed 30% Company Tax on its profits and then a shareholder was taxed their 30% Marginal Income Tax Rate on their Dividends from the company, then they are regarded as having been taxed twice on that profit.

฿ To avoid this, the company is given Franking Credits that acknowledge the tax they have already paid. When the company makes a payment to shareholders they may pass on the Franking Credits to them. They are then accounted for in the shareholder’s Tax Return and effectively return the Company Tax paid before the individual’s marginal tax rate is then applied. Each Franking Credit is effectively worth another dollar of income earned before tax (without Super contributions or any other benefit that comes with extra income).

฿ For a person whose marginal tax rate is 0% (even after their extra dividend income) the Tax Office will refund them $1 for every Franking Credit. They earn low enough income that they get back the full company tax paid on that income. Someone on a Marginal Tax Rate of 45% will have to pay more tax because of their Dividends to account for the fact that the profit of the company has been taxed at only 30% and the tax rate applicable to them is higher. They are effectively topping up the rate of tax but are still better off than if they had paid the full 30% Company Tax followed by the full 45% Income Tax.

CGT (Capital Gains Tax)

฿ CGT (Capital Gains Tax) is levied on the sale of shares that are sold at a profit. It could be seen as a success tax, but one that can largely be avoided for a long time by not selling shares. If shares are sold, CGT needs to be accounted for and anticipated because it may have to be paid all at once at tax time. Capital Gains Tax can also apply to some Dividends and Distributions. This information can be found on the relevant share registry website for that share.

฿ To calculate the Capital Gains Tax that applies from share sales you will need to account for the original cost of the shares that were sold, which specific units of shares were sold (you can choose whichever ones you want), how long they have been held for and any change to the cost base of the shares since you have owned them. If they were held for over one year before being sold, they qualify for the CGT Discount of 50%. Some things may cause the cost base values of the shares to change. That information is available on the relevant Share Registry website. The cost base is the record of what the shares were bought for. Some Dividends or Distributions, or other events, may mean that they need to be changed by a certain amount. This leads to CGT being calculated as if they had been bought for their new cost base in the first place.

Returns and Performance

฿ The returns of a company, or fund, refers to the sum of all its monetary benefit to shareholders over a certain period including gains or losses from share price changes. Usually adding, in percentage terms, the dividend of a company to the increase in the share price gives the approximate return of that investment. This can be compared to the performance of another asset or cash interest rate. The returns of a share investment can often be negative over any period. They are usually expressed as a percentage per annum. This number compounds yearly. You can look up companies or funds to see how they have performed over time as well as their current price. One easy place to see this is on Google Finance - click here.

฿ Companies and funds that are traded on the ASX all have a code. They can be used to search them quickly or the full name of the company can be googled along with ‘ASX’. ASX codes are used to buy and sell the right shares when trading on a platform. You can see other information on Google Finance or the ASX website such as a company’s Market Capitalisation or Price/Earnings multiple. The Market Cap of a company is the value of all its shares put together and is used as a measure of the importance of a company, its size and how much to invest in it to match an Index. Price/Earnings multiples are a measure of how expensive a share is considering its share price and profitability. It needs to be used in the right context and means little on its own.

Volatility

฿ In the short term, the prices of companies can seem to move at random as can be seen by looking up shares online. Periodically, world events will create crashes in the value of shares for what may be a significant period. Some companies may really struggle as a result but most will get through and regain their fair value. Selling during these low periods locks in losses and avoids the gains of eventual recovery. At other times there are periods of surprising economic or business success that cause rapid gains in share prices.

฿ Overall there are more good times than bad for major share markets. Even between crashes and spikes shares do not tend to rise smoothly, which makes it difficult to measure progress. They have been extremely volatile at times but their results in the long run speak for themselves. Download the Vanguard Index Chart to see how shares have performed relative to other asset classes over the last 30 years. - click here.

Indices

฿ A share Index is a way of tracking the performance of a group of companies. Feel free to contact The Stock Scholar about these topics at thestockscholar@klevah.com.au The best-known Indices are the ones that measure the performance of national stock markets to compare them with other countries and other periods. These Indices pick a selection of companies to follow. They take the share price movements of their companies and use them to create a score. The larger companies’ price changes usually affect the score more than the smaller ones. The extent of this is referred to as the weighting of each company. An Index therefore works like a share portfolio, with different amounts invested in each company according to a well-publicised method. When you hear that a country’s share market went up or down by some percentage, you are hearing about the movement of that country’s most followed Index.

฿ This gives everyone a single number to use to assess how the market is performing overall. The percentage changes in the points score are referred to as the returns of that Index. The returns can then be judged against any other return or interest rate. People who make share investments benchmark their portfolio’s performance against the Index of the country they are investing in to see if they are doing an above, or below, average job.

฿ Over time an increasing portion of investors have wanted to invest in a way that can give them the Index, or average, return instead of trying to beat it and risk losing out. To do this you could invest in every company in an Index in proportion to their size. The problem is that there are higher costs involved in buying and owning so many different companies. It is impractical for a small investor to invest in 500 different companies, for example.

Index Funds

฿ Index funds are funds that people can put their money into that copy the way an Index is constructed. This gives the investors in the fund the investment results of the Index. If they invest in a country’s most followed Index through a fund, then it will perform the same as what the country’s share market is reported to have done in the news. Investing in this way lowers the cost for the individual to spread their investment dollars around the economy. Instead of one person buying hundreds of shares, many people buy into one fund. That fund buys all of the desired shares on their behalf to match the Index. This results in far fewer transactions involving fewer middlemen and saving costs and accounting time for investors.

฿ Investors can find out how an individual Index works and what companies it contains to know exactly how the relevant Index Funds will invest. This gives predictability as far knowing that returns will follow the Index but still uncertainty about how the Index itself will perform. It is a case of following the herd rather than trying to beat them. Ironically the lower cost of Index Funds means that this approach does outperform the herd’s average in the majority of cases. There is no problem with going with the crowd when share returns are so high on average.

฿ Copying the Index means that money is saved on investment experts, advisors, accountants and costs of trading in and out of companies. Index Funds can pass on low costs into low fees to attract investors. New investors can now have low cost and diverse investments from the start. There is a sense of relief and comfort in the simplicity of this approach for many investors. John Bogle, who was a pioneer in Index investing, said “Don’t look for the needle in the haystack. Just buy the haystack!” The main reason that share investing is worth doing is that overall there are more winners than losers over time. If you buy some of everything you will therefore win overall.

฿ There are Funds like these which you can buy shares in on the stock exchange that are called Exchange Traded Funds (ETFs). Remember the name! Not to be confused with Electronic Funds Transfers (EFTs). This is a far more convenient way to invest across the market according to an Index. Not all of them track a traditional Index. Some track niche Indices or do not follow an Index at all.

฿ Contact The Stock Scholar about any of these topics here. thestockscholar@klevah.com.au

ETFs (Exchange Traded Funds)

฿ Exchange Traded Funds are funds that you can invest in simply by purchasing shares in them on the Stock Exchange. Hence the name. Some are Index ETFs and others are not tied to an Index. They provide a more convenient way to invest in a fund that the traditional way of having to engage with the Fund Manager about organising an investment in their fund.

฿ Because they trade on the Stock Exchange (the ASX in Australia), they have a code of a few letters and/or numbers to differentiate each traded product, unit, or share. Knowing the code of an investment is vital to trade in it and to avoid confusion between similar sounding investments.

฿ Each ETF will have a theme it invests in, usually briefly described in its name. Looking on the particular ETF product’s website will reveal what companies it actually invests in, ranked from largest investment to smallest. Index ETFs will state what Index they follow, so useful information can be found about the fund by investigating the Index as well as reading the Fund’s web page.

฿ To recap what an Indexed Exchange Traded Fund is, it is an investment fund that you can buy shares in on the Stock Market. It invests in many shares across the share markets in a way that it clearly advertises. As a shareholder in the fund you can receive all of the benefits that come with owning some of each those companies. This saves you from having to invest in many different things yourself. The Indexed variety of ETFs invest the funds that they manage for shareholders in a manner that copies a particular Index. An example Index is the S&P/ASX 200. A fund that invests according to that Index invests in the 200 largest companies on the Australian Stock Exchange. The main things to keep track of are the Stock Exchange code for that ETF, the name of the ETF, the Issuer (or company that manages the ETF), what Index it invests in if it is an Index ETF, what the fund objective is and what companies it is invested in now.

฿ Here are two examples of the key information about these ETFs:

1. Vanguard Australian Shares Index ETF (VAS)
This ETF has the code VAS. That is the unique code of this ETF on the Australian Stock Exchange (ASX) that is used when trading in the fund’s shares. The name of the ETF is as shown above. The Issuer is Vanguard. That is the company that manages the ETF. The ETF invests in the S&P/ASX 300 Index. That is a collection of the 300 largest shares trading on the ASX. The objective of the ETF is that it seeks to track the return of the S&P/ASX 300 Index before taking into account fees, expenses and tax. That means it invests in the companies that make up the Index. The companies it invests in can be found on its website (Google ‘VAS ASX’). The performance of these companies will determine the returns of the ETF. The ETF concept is surprisingly simple once you get the hang of it.

2. Nasdaq 100 Currency Hedged ETF - HNDQ
This ETF has the code HNDQ. The name of the ETF is as shown above. The Issuer is Betashares. It invests in the Nasdaq 100 Index. The objective of the fund is to track the performance of the Nasdaq 100 Index before fees and expenses. The companies it invests in can be found on its website (Google ‘HNDQ ASX’). It also says in its name that it is currency hedged. This removes movements in the AUD/USD exchange rate from the returns of the fund.

฿ Contact The Stock Scholar about any of these topics here. thestockscholar@klevah.com.au

ETF Takeover

฿ Exchange Traded Funds (ETFs) have grown significantly in popularity and have largely overtaken other traditionally structured funds. There are now over 400 ETFs on the ASX. It is most useful, when speaking to new investors, to talk about ETFs as the ideal funds because they are the most practical generally. They provide a great combination of low cost, strong performance (the sensible ones) and ease of use. They also proved they can handle a market crash during the Covid pandemic. It is still probably wise to own multiple ETFs from different Issuer companies. Most ETFs are unsuitable for new investors, however, for a whole number of reasons including high fees, niche ideas, unnecessary geographic diversification and risk.

฿ Issuer is the name for a company that manages ETFs. To begin with, an Issuer starts a fund by choosing a particular theme or Index for the fund and investing money accordingly. They sell shares on the Exchange that give people ownership of part of the fund and use that to make further investment in it. Once there are enough shareholders out there, they can sell their shares in the ETF to other investors on the Stock Exchange. That creates a market for the fund and the Issuer can take a small ongoing fee from the fund. Fees are kept reasonable by the competition between Issuers.

฿ Economies of scale mean that the more popular the ETF, the more the costs of maintaining it fall and the lower the fees. This is a benefit of investing in the popular broad national indices with the lowest fees. The Issuers periodically sell more shares into the market to grow their funds if there is strong enough demand. You can look up the websites of Issuers for all the relevant information on their products (ETFs). Make sure you are looking at the right page with the right name and code at the top.

฿ You can ignore the suggestions on these sites to buy the shares with the Issuer’s share trading platform. It is not necessary as you can choose your own platform and use it for all of your share trades. Finding a Platform - Click here.

Perceptions

฿ Perceptions of shares can be a confusing blend of understanding their power but fearing their use. Compulsory superannuation, which predominantly benefits people through almost forcing them to own shares, is extremely popular. There is general awareness that the Future Fund is incredibly successful and even that Norway has an enormous Sovereign Wealth Fund. Most people, however, would never consider owning shares outside of Super. They are also considered to be something for the rich to enjoy but not the rest of us.

฿ These days as little as a thousand dollars can be invested in an ETF at low cost. The most difficult part of the equation is the emotional side. This applies both to apprehension in getting involved and the urge to bail out at the first sign of real trouble. Some say that managing emotions is essential to good investing. Others believe it best to accept that emotional responses will happen and stick to a sensible plan regardless of them. Having the right strategy in place from the start and expecting market falls from time to time improves a new investor’s chances. Experiencing success and seeing a sensible plan through will likely lead to less distracting emotional responses in time.

฿ Discover more about the administration of shares such as:
Trading - click here.
Records - click here.
Paperwork - click here.
Tax - click here.

฿ Read about a Basic Strategy that uses Index ETFs to balance risk, return and simplicity. Click here.

฿ There are a couple of extra details when investing for children. Firstly, children cannot own money or financial assets. This means that the investments must be held in a structure, such as an account in their parents’ names, that is designated for the child. For information on the topic please visit the ATO website while being prepared for a little confusion. ATO website - click here.

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