CONTENT OF GETTING STARTED IN SHARE ASX
Introduction
What is a share?
Interactive exercise: Investment performance calculator
Better returns over the long-term
Interactive exercise: Financial return graph
Tax considerations
Diversity
Control over your financial future
Creating wealth for Australia
Interactive exercise: Listed company quiz
What is ASX?
Direct and indirect investment
Types of shares
Derivatives
Types of fixed interest products
Interactive review questions
Setting your investment goals
What is a stockbroker?
Types of stockbrokers
Choosing who to use to buy and sell shares
Providing personal information
Questions to ask your adviser/stockbroking firm
Buying shares in a float
Buying existing shares
Interactive exercise: Buying and selling shares
Placing an order with your adviser
Paying and settling
CHESS statement explained
Fees and other costs
Supervision and regulation of the sharemarket
Interactive review questions
Understanding newspaper share tables
External factors impacting on the sharemarket
Tracking the sharemarket using share price indices
ASX services
Other sources of information
Interactive course quiz
Questionnaire
Where to from here?
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(1) Introduction
Whatever your stage of life, you will have hopes and plans for your future. Your goals may be long-term and include financial well-being for you and your family or a comfortable retirement that doesn’t rely on a government pension. Alternatively, you may have more immediate goals such as saving for a home deposit, setting up your own business or planning for your child’s education. It is never too late to establish a regular savings plan and develop an investment portfolio.
The sharemarket provides one of the best opportunities to achieve your long term financial goals. And a significant advantage is that you can start small. Your initial purchase can be a parcel of shares valued as low as $500, although many advisers would recommend starting with at least $2000.
Half of Australia’s adult population – 8 million people (2004, ASX, Australian Share Ownership Survey) – have some exposure to the sharemarket, including 6.4 million who directly invested in shares listed on ASX, in 2004
(2 )What is a share?
When you buy shares in a company, you own part of that company and may benefit by receiving a part of the profits (in the form of dividends) and by sharing in any capital growth in the value of the company.
The company benefits by raising funds (capital) to operate and expand its business without needing to borrow money to do so.
(3) Better returns over the long-term
History demonstrates that shares, as a long-term investment, have the potential to provide better returns than any other major investment.
However, past performance is not a guarantee of future returns.
Share values have historically risen over the long-term, but this has been punctuated with periods of short-term volatility, where prices can go up or down very quickly. For this reason, it is usually important to adopt a medium to long-term share investment view of five years or more. This can assist in realising capital growth and minimising the impact of short-term volatility.
(4) Tax considerations
Because there can be tax benefits associated with share investment, it is important that you consider your taxation position prior to investing funds. GST is not imposed on the purchase or sale value of shares bought and sold, as transactions of this nature constitute a financial supply, which is input taxed for GST purposes. However, GST will be imposed on brokerage fees associated with such transactions. It is up to the discretion of the stockbroking firm/adviser if they pass on the cost to the client.
Three other major changes to the taxation legislation have occurred in recent years that impact on investors. These are: dividend imputation, employee share schemes and capital gains tax (CGT).
Dividend imputation
Prior to the introduction of dividend imputation, company profits paid as dividends were effectively taxed twice: first at the company level and then again when the dividend was received by the shareholder. Dividend imputation now allows the shareholder to gain the benefit of company tax which has already been paid.
Franked dividends are those paid out of profits on which a resident company has paid company tax in Australia. These carry imputation credits which entitle shareholders to a rebate or a reduction in the amount of tax to be paid. If the shareholder’s marginal rate of tax is lower than the company tax rate, the excess franking rebate can be used to reduce the tax payable on other sources of income.
The value of imputation credits depends on the rate of tax the company has paid. Companies may pay fully franked, partially franked or unfranked dividends.
Employee share schemes
Employee share schemes allow employees to purchase shares at a discount to the market price as an incentive to take up shares in the company. This discount is then assessed as income for tax purposes; however, there is a tax exemption threshold up to $1,000. To secure the exemption you must make a written election and the conditions of the scheme must prevent disposal of the shares before cessation of employment or within 3 years of acquisition, whichever is earlier. Additionally for the exemption to apply there should be no conditions in the scheme which could lead to forfeit of the scheme and the share scheme must be non discriminatory.
For information on employee share scheme tax implications, contact your accountant or professional adviser.
Capital gains tax
For many people the growth of their investments’ value is more important than income generated from their shares. If you sell an investment for more than you paid for it, you could be liable to pay capital gains tax. If your shares were purchased on or after 21 September 1999, the new CGT system will apply to you. In this case, if the shares are sold 12 months or more after the date of acquisition, then only half of the realised gain from the disposal of these shares will be included in your taxable income. However, if the holding period was less than twelve months, no concession under the new system will apply and the full value of realised gain will be included in your taxable income. Under the new system, there is no indexation.
If the shares were purchased prior to 21 September 1999 but sold after this date, you have a choice as to how to calculate the taxable capital gain.
You can choose to apply the new discount rules and forgo indexation (see above). Or you can retain a degree of indexation of the cost base, but forgo the discount. Note that indexation does not extend beyond the September quarter 1999.
This choice only has relevance if the shares are held for more than 12 months. Neither the indexation or discount option is available for shares held less than 12 months.
For information and advice on the tax implications of share investments you should consult your accountant or professional adviser.
(5) Diversity
Most people realise the benefits of spreading the risk across a range of investment categories such as shares, property, cash and fixed interest deposits.
You can further diversify your portfolio by making a number of different types of investments within each major investment category.
In relation to shares, this is achieved by investing in a number of different companies within different industries. There are 11 different industry groups to choose from such as Energy, Consumer Staples and Property Trusts.
All stocks listed on ASX are classified under the Global Industry Classification Standard (GICS) which has been developed by Standard & Poors and Morgan Stanley to make possible sector analysis and investment on a global basis. The current groups replaced the 24 industry groups previously developed by the Australian Stock Exchange and its predecessors.
Well-established companies with historically stable performance are known as blue chip companies. You may choose a blue chip company in the expectation of greater reliability or security, or consider shares in one of the more speculative stocks if you are prepared to take greater risks with your capital for the potential to make greater returns.
It is important to remember that generally, the higher the potential return, the higher the risk. Share prices of any company, even a blue chip, are always subject to change as a result of various influences, both domestic and international.
Below is a table listing the 11 sectors with examples of companies which form part of the particular industry group.
Industry Group Companies
Energy Oil Search, Santos, Woodside Petroleum
Materials Anglo Gold Ashanti, BHP Billiton, Rinker
Industrials Brambles, Coates Hire, Qantas
Consumer Discretionary John Fairfax, Domino’s Pizza, TAB
Consumer Staple Coles Myer, Foster’s Group, Woolworths
Health Care CSL, Mayne Group, Blackmores
Property Trusts GPT Group, Stockland, Westfield
Financials (ex Property Trusts) AMP, National Australia Bank, Westpac
Information Technology Technology One, MYOB, Baycorp Advantage
Telecommunication Services Hutchison, SingTel, Telstra
Utilities Australian Gas Light, Australian Pipeline, Envestra
Diversifying into fixed interest
Diversification can also be achieved by having different types of securities within your portfolio. Bond and Hybrid securities can be traded on ASX in the same way as ordinary shares. These securities provide the potential for regular income through interest or franked dividend payments. Talk to your broker or visit the Interest Rate Securities section of the website.
(6) Control over your financial future
To have real control over your investments, you must have an ability to choose, flexibility to act as circumstances change, and the opportunity to earn an income and capital growth to suit your individual needs.
Choice and flexibility are two of the obvious advantages of share investing. With shares your selection can be based on your needs for income or future capital growth. You may also wish to use share investment to manage your tax position. You should obtain independent advice from a licensed professional adviser prior to making any financial decision.
Flexibility comes from the degree of liquidity in the sharemarket. At any one time there are usually buyers and sellers for shares in most major companies. This means you can buy shares when it suits you and sell them again when you want to alter your investment strategy or raise cash to meet any financial requirements.
(7) A company that wishes to set up a new business, or expand its existing business, can raise the money it needs by issuing shares to investors. The investors become shareholders in the company, meaning they are part owners of the company and share in its profits and growth.
The sharemarket serves two functions:
providing a link between companies needing funds to expand and people with funds to invest; and
providing a marketplace for trading shares at the current market price.
Creating wealth for Australia
On a typical day, there would be few Australians who do not buy the goods and services produced by one or more of the companies listed on ASX. For example, if you shop at Woolworths or Coles Myer, bank at Westpac, NAB, ANZ or Commonwealth, or read The Australian Financial Review (John Fairfax Holdings Limited), you are using products and services of ASX listed companies.
The current ten largest companies listed on ASX are: 1. BHP Billiton 2. NAB 3. CBA 4. ANZ 5. Westpac 6. Westfield 7. Telstra 8. Woolworths 9. Macquarie Bank 10. Rio Tinto.
If an ASX listed company increases profits, the company may choose to distribute that profit in a number of ways. Higher profits mean the company can choose to pay higher dividends to its shareholders including you, if you own some of its shares. The company also benefits because if there is strong interest in its shares, it will be able to raise capital at a lower cost when it needs to in the future.
(8) What is ASX?
As Australia’s national stock exchange, ASX has primary responsibility for the operation of a sharemarket where companies and trusts can issue securities (such as shares) to raise equity capital, and investors can invest and trade those securities to create wealth for themselves. There are over 90 stockbroking firms which can assist with these investments.
ASX is one of the largest sharemarkets in the Asia-Pacific region and the eighth largest national sharemarket in the world by domestic market capitalisation. There are approximately 1,700 companies listed on ASX. Over the last decade, the market capitalisation of domestic companies listed on ASX has increased from $280 billion to $975 billion by 30 June 2005. Growth over the last financial year was more than 16%.
Australia has a relatively mature sharemarket with medium to long-term price movements on ASX being similar to those on major overseas exchanges.
To maintain market integrity, there is a high level of regulation and supervision by ASX of its markets. Surveillance systems, business rules and listing rules, which regulate the operation of listed companies and brokers in their dealings on ASX markets, are regularly updated with the co-operation of government regulatory authorities, including the Australian Securities and Investment Commission (ASIC).
(9) Direct and indirect investment
You can buy or sell shares directly through a stockbroking firm, either by accepting the current market price the shares are trading at, or waiting until the price changes to a level to which you are attracted.
Alternatively, you can make an indirect investment by placing your money with a fund manager to invest on your behalf. You can, for example, buy units in a cash management trust, property trust or managed share investment fund, or you can put your money into a superannuation fund that invests in the sharemarket.
Indirect investments are often referred to as managed investments because the fund manager makes the investment decisions, removing the control and responsibility from the individual investors. The fund manager usually charges an ongoing fee for this service. Entry and exit fees may also apply.
Exchange Traded Funds (ETFs)
ETFs are listed unit trusts that combine some of the features of investing in shares with investing in managed funds. Also known as “Tracker Funds”, ETFs provide investors with the ability to gain exposure to a number of companies listed on ASX as easily as buying the shares in the individual companies on ASX.
(10) Types of shares
Not all shares are the same. It is important to know about the different types of available securities in order to understand your rights and responsibilities. The following list summarises the key types of shares and the attributes associated with each.
Ordinary shares
most common form of share ownership
receive benefits of dividend distribution
voting rights at meetings
receive benefits from capital growth
if the company is wound up, shareholders of ordinary shares rank last in priority
Preference shares
usually have a fixed dividend rate
preference dividends are paid before ordinary dividends are announced
preference shares rank before ordinary shares in any distribution of assets
Contributing shares
partly paid
require certain future payments at certain future dates
shareholders are obliged to pay outstanding capital when due, unless the company is a no liability company in which case shares can be forfeited instead
Bonus issue
a free issue of new shares to a company’s shareholders usually on a pre-determined ratio to the number of shares already held
reflects improved value of company’s assets
Rights issue
a privilege granted to existing shareholders to buy new shares in the same company, usually below the prevailing market price
rights may be taken up or, in some cases, sold on the sharemarket
(11) Derivatives
A derivative is a financial instrument that derives (hence the name) its value from the price of another more basic instrument. Types of derivatives traded at the ASX are exchange-traded put and call options and warrants.
Derivatives can be used to reduce the risk of a shareholding by locking in a selling price to protect against a market fall; alternatively they can be used to increase risk, and hence return, by allowing investors to speculate on a move in a particular share price.
Derivatives are used by all kinds of investors from large institutions right through to small investors. To find out more about how you can use derivatives, call ASX Customer Service on 131 279 for a free explanatory booklet, or visit the options and warrants section on the ASX website.
(12) Types of fixed interest products
Bonds
Bonds are issued by a company or financial institution. They are at a fixed rate of interest for a specific period of time. For example, a 10 year bond pays interest (coupons) at specific dates during each of 10 years. At the end of that period (maturity of the bond) the initial amount paid for the securities (the face value) is returned plus the final coupon payment. The price which unsecured notes trade and settle on ASX can be affected by a number of factors including interest rates, strength of the issuer, and supply and demand in the market. Brokers can also assist in the conversion of price to yield for these securities.
Convertible Note
A Convertible Note is a type of coupon paying debt security that converts to the issuer?s ordinary shares (equity) at maturity. Generally speaking these securities pay a fixed (or floating) return until a certain date when the security can be converted into the underlying shares of the issuer.
Floating Rate Notes
Floating Rate Notes (FRNs) return a variable coupon payment for a specific period of time. These coupon payments are set usually semi-annually or quarterly, over an underlying rate such as the Bank Bill Swap (BBSW) rates published by Australian Financial Markets Association (AFMA). These rates will fluctuate as interest rates rise and fall.
Once again the initial investment amount is repaid on maturity. It is important to note that some FRNs are perpetual in nature and do not mature. To exit these types of securities they must be sold on the ASX Interest Rate Market (IRM) – in the same manner as you sell shares. Investors need to be aware that prices in these securities may fluctuate over time.
Hybrids
A broad classification for a group of securities, used by ASX listed companies to raise money, that combine both debt and equity characteristics. Hybrid securities pay a predictable (fixed or floating) rate of return or dividend until a certain date. At that date the holder has a number of options including converting the securities into the underlying share. Therefore unlike a share the holder has a ‘known’ cash flow, and, unlike a fixed interest security, there is an option to convert to the underlying equity. More common examples include convertible and converting preference shares. It is important to note that a Hybrid security is structured differently and while the price of some securities behave more like fixed interest securities, others behave more like the underlying shares into which they convert.
For more information on interest rate products visit the Interest Rate Securities section of the ASX website or call 131 279 for a brochure.
(13) Setting your investment goals
Before investing in shares, it is generally advisable to ask yourself a series of questions to ensure this type of investment is right for you.
Some of these questions are:
what do you want to achieve from your investments?
do you want a return in the form of income or capital growth?
are you prepared to risk some of your investment capital for the opportunity to make higher returns?
do you need additional security?
Your age and time frame for investing may affect your decisions. A full service broker can help assess your current financial situation and set your financial goals for the future. If you have a spouse or partner, ensure they are fully informed about your investment decisions.
An investment in shares can start from as little as $500 plus brokerage costs. Generally people would start with an investment of $2000 due to the cost of transaction.
(15) What is a stockbroker?
A stockbroker has direct access to the market for trading shares. Therefore they can act as your agent to buy or sell shares, for which a fee is charged. A broker may also offer a range of other products and services including providing advice on which shares to buy or sell.
Why do you need a broker?
All shares listed on ASX can only be bought or sold through a broker.
All stockbrokers must have a minimum two years’ experience in the industry, proven business integrity, an appropriate tertiary qualification as well as being PS 146 compliant. Stockbrokers and their representatives must comply with the ASX Market Rules and the Corporations Law. Being a broker involves passing rigorous testing and substantial investment in equipment to access ASX’s markets
What do brokers do?
Apart from buying or selling shares on your behalf, most advisers or stockbroking firms also offer:
advice on traditional investments such as shares, debentures, government bonds and listed property trusts
investment advice on a wide range of non-listed investment options (eg cash management trusts, property and equity trusts, etc)
investment plans tailored to your financial needs
planning, implementing and monitoring of your investment portfolio
retirement planning
research on national and international trends to help maximise your returns and minimise risk.
(16) Types of stockbrokers
The main difference between the two types of stockbrokers is whether they offer advice or not.
Advisory broker (full service)
Full service brokers offer advice on buying and selling shares, make recommendations and provide research. They also offer advice on other investments such as options, debentures and bonds and compile tailored investment plans. As full service brokers offer advice you generally pay a higher brokerage fee to buy and sell shares. Some full service brokers offer the ability for you to place your order online however they will still provide advice about the transaction that you wish to complete. You may incur different charges for placing your order online rather than via telephone.
Non-advisory broker (discount)
As the name suggests, non-advisory brokers offer no recommendations or advice regarding the appropriateness of your decision, consequently their brokerage fees tend to be lower than a full service broker. This is an attractive option for investors confident in their sharemarket knowledge and trading decisions.
Phone non-advisory
A phone non-advisory broker will act on your telephone instructions to execute an order on your behalf.
Internet non-advisory
An internet non-advisory broker will execute an order that you have placed through their internet site by entering it into the trading system. The lower overhead costs of this service frequently mean that the brokerage fee is lower.
(17) Choosing who to use to buy and sell shares
If you need help in selecting a stockbroking firm or adviser, visit the Stockbroker Referral Service on the ASX website.
You need to first decide whether you want advice on what to buy or sell and when to do so. Although broking firms generally do not charge for this advice, this service is reflected in higher brokerage fees on the actual buying or selling of shares.Those firms not offering advice generally charge lower fees.
If you are just starting out in the sharemarket and don’t feel confident in your sharemarket knowledge you will probably value the advice of a full service broker. If you are interested in low cost trading and are confident in your knowledge of the sharemarket you may wish to choose a non-advisory broker.
After deciding what type of services to seek from a broker, you can choose any of the following:
Speak to a client adviser at a stockbroking firm. There are over 70 stockbroking firms, many with branches throughout Australia. Most of them employ a number of advisers to service individual investors.
Your financial planner and/or accountant may have an existing arrangement with a stockbroking firm and can arrange an introduction and/or the purchase or sale of shares.
Some banks offer facilities to purchase shares via their branch network and/or a special customer service area.
Purchase shares directly via a public float ? see the section entitled ‘Buying shares in a float’ for more details.
Use the Internet to buy shares. Your purchase will, however, still be via a broker’s website.
(18) Providing personal information
When a broker provides advice, the broker is generally obligated to ask you about your current financial situation (such as assets, debts etc) before providing advice. You will most likely be asked to fill out a form with your financial details for the advisers’ records.
You don’t have to supply this information; however, the adviser can only make relevant recommendations about investment options with knowledge of your specific circumstances, needs and objectives. It may also be a good idea to meet your adviser in person before you start doing business together. Non-advisory brokers do not require this information as they do not give advice.
(19) Questions to ask your adviser/stockbrocking firm
What type of services do you provide?
Depends on what services you are seeking – do you require advice and/or trading services?
How do you charge for your services?
Depends on your requirements for value for money (eg brokerage or a flat fee).
How might you review my investment portfolio and how regularly would you do that?
Depends on your objectives and how active you want to be. Expect a quarterly review. This could involve reweighting your portfolio and reviewing the overall performance of your shares.
How will you inform me of any new sharemarket opportunities?
Expect email or mailed updates on opportunities, regular newsletters with research, and access to the firm’s website.
Will I receive a newsletter or any other regular information?
If you are looking for a broker to provide you with a full advisory service, the answer should be yes. Ask to see a sample.
Do you conduct client seminars?
If you are looking for a broker to provide you with a full advisory service, the answer should be yes.
Are you or your firm associated with any of the companies whose products are recommended by you?
Should indicate no association unless a full disclosure is given.
What research facilities does the firm make use of?
If you are looking for a full advisory service, the answer should be the use of an internal research department, or subscriptions to local and overseas research organisations.
(20) Buying shares in a float
The word float is used when a company seeks to raise capital by offering its shares to the public for the first time. The company must first submit details of its business and the proposed share issue to ASIC in the form of a prospectus.
Once the prospectus is lodged with and, if applicable, registered by ASIC, it can then be forwarded to potential investors for consideration. If you wish to invest in the company, you must first review the prospectus, fill in the attached application form, specifying the number of shares you want to buy, and send it with your payment to the company or lodge it with your adviser.
Once a company has circulated its prospectus to the public, the shares have been subscribed and the application deadline reached, the underwriter (eg a stockbroking firm) is committed to purchasing any unsold shares. Lodging and/or registering a prospectus with ASIC and ASX listing of a company does not guarantee the company will be successful once share trading begins.
If there is a great deal of investor interest in a new float, you may be allocated fewer shares than the number you applied for or none at all. With some floats, the initial share price (issue price) is not set until just prior to the first day of trading. You should obtain independent advice from a licensed professional adviser prior to making any final decision.
(21) Buying existing shares
Investors’ buy and sell orders are entered into ASX’s Stock Exchange Automated Trading System (known as SEATS).
The orders are entered by approved operators within stockbroking firms using SEATS terminals located in their offices. SEATS matches buying and selling requests by price in the order they were entered into the system. That way, every order gets processed on an equal basis, and larger investors do not gain priority. When a buy order is matched with a sell order a trade occurs.
(22) Placing an order with your adviser
Most stockbroking firms require you to provide funds prior to accepting your first order to buy shares. Many brokers will require that you set up a client account or trading account before you can start trading. This can take up to a week to finalise but can usually be done in 24 hours. Frequently brokers will require that you establish a cash management account with a bank or financial institution. This is to facilitate easy transfer of funds to pay for your purchase of shares and to allocate proceeds to you from the sales of shares. Once your relationship or account has been established, you can place orders to buy and sell shares.
When you place an order to buy or sell shares, you have a choice of two ways to tell your adviser what price you will accept. You can place your order ‘at market’, meaning you will accept a price at or about the market price of the shares at the time you are placing your order. Alternatively, you can place your order ‘at limit’, and inform your adviser of the highest price you are prepared to pay or the lowest price at which you will sell.
When placing an order with your adviser, make sure you are fully informed and that your order is confirmed. Ask the current market price and write it down. Then tell your adviser the details of your order (ie the amount of shares to be bought or sold and the price at limit or at market). They should then repeat the order back to you.
Your adviser will not necessarily call you as soon as your order has been filled. However, if you place an order very near the current market price, it may be filled quickly. If you change your mind about the order after it has already been filled, you are still bound to pay for the shares you have bought, or release the shares you have sold, even if you have not yet received the contract note.
(23) Paying and settling
Within three days of your broker executing your order you will need to enable the transfer of these shares, either by organising payment for the stock you have purchased, or providing access to shares you have sold.
ASX has decreased time it takes for your trade to settle because all holdings are now registered electronically on either CHESS or the issuer sponsored sub-register. CHESS (the Clearing House Electronic Sub-register System) is operated by a subsidiary of ASX on behalf of the listed companies. Issuer sponsorship involves the company (or issuer) through which the shares are issued, controlling the shareholding on your behalf.
To hold shares electronically on CHESS, you enter into an arrangement with your broking firm to act as your CHESS sponsor. The adviser can then electronically register details of any purchases or sales.
The mechanics of how you settle your transactions will depend upon where your shares are registered. If you have sold shares held on the CHESS sub-register you will need to provide your broker with your holder identification number (HIN) to allow access to transfer the shares for settlement. If sold shares are held with an issuer sponsored company, you will need to provide your broker with your Security-holder Reference Number (SRN) to allow access.
(24) CHESS statement explained
CHESS was developed to reduce the amount of paperwork and speed up the share transfer process, thus eliminating the necessity for public companies to issue share certificates. This means that instead of sending out new certificates every time shares are bought and sold, an electronic record is kept. Shareholders receive an initial statement when the holding is established, and then subsequent statements at the end of any month in which the holding balance changes.
Below is an interactive exercise that will provide explanations for various sections of a CHESS statement as you move your mouse over the circled letters. Be sure to scroll the page down until the CHESS statement is fully visible, so that you can see the explanations which will appear toward the bottom of the statement.
CHESS statement explained
CHESS was developed to reduce the amount of paperwork and speed up the share transfer process, thus eliminating the necessity for public companies to issue share certificates. This means that instead of sending out new certificates every time shares are bought and sold, an electronic record is kept. Shareholders receive an initial statement when the holding is established, and then subsequent statements at the end of any month in which the holding balance changes.
Below is an interactive exercise that will provide explanations for various sections of a CHESS statement as you move your mouse over the circled letters. Be sure to scroll the page down until the CHESS statement is fully visible, so that you can see the explanations which will appear toward the bottom of the statement.
(25) Fees and other costs
Once you have appointed a stockbroker to act on your behalf and made your initial investment with them, you should note that other fees and costs will be incurred.
There is a brokerage fee for any purchase or sale of shares. Brokerage will be charged for each transaction. An order to buy or sell shares in two different companies is considered to be two separate transactions.
Brokerage rates on share transactions were deregulated in 1987 and, as a result, the rates are sometimes negotiable. As a first step, you should ask your adviser for the firm’s scale of fees.
Brokerage fees may involve a minimum amount or be based on a percentage of the transaction value. There will be a wide variation in fees depending on whether or not the broker offers you advice. Non-advice or ‘discount’ brokers may buy or sell shares on your behalf for as little as $30. Online broker fees can be as low as approximately $20.00.
As a guide, 2.5% or a higher flat fee brokerage is charged by many advisers on smaller transactions, usually under $5,000, with the percentage reducing on transactions of higher value. Fees currently charged can range from $30 to $120 per transaction.
Sliding scale of brokerage fees (indicative only):
First $5,000 2.5%
Next $10,000 2.0%
Next $35,000 1.5%
Amounts thereafter 1.0%
(For example, on a purchase or sale of shares worth $3,000, the brokerage is $75.00.)
Brokerage fees differ between stockbroking firms depending on the services they offer. Firms which provide company research compiled by their industry analysts will often charge higher brokerage fees to support this additional service. Some full service firms offer trading via the Internet. For information on those firms which have this facility phone ASX Customer Service on 131 279 or visit the Broker Referral service on the ASX Internet site.
Generally, ‘non-advisory’ or ‘discount’ stockbroking firms do not provide investment advice and you can only use these firms to execute a purchase or sale for you on SEATS. Non-advisory firms usually charge reduced or flat rates. Most online brokers fall into this category.
GST will not be imposed on the purchase or sale value of shares bought and sold, as transactions of this nature constitute a financial supply, which is input taxed for GST purposes. However, GST will be imposed on brokerage fees associated with such transactions. It is up to the discretion of the stockbroking firm/adviser if they pass on the cost to the client. For example, if brokerage costs were $28.00 in respect of the example above, then the GST payable would be $2.80 (based on an illustrative rate of 10 percent on the value of the taxable supply). Stamp duty on share transactions was abolished as of 1 July 2001.
(26) Supervision and regulation of the sharemarket
The ASX market is governed by various rules and regulations including the ASX Market Rules and the Corporations Act 2001 (Cth).
The ASX Surveillance Department electronically monitors ASX’s market for any irregularities in the dealings of brokers and listed companies on its markets. If the Corporation Act 2001 (Cth) or the ASX Market Rules are breached, the relevant authorities, including ASX, may take action against the parties involved.
Participating Organisations of ASX may be disciplined or penalised for breaching the Corporations Act 2001 (Cth) or the ASX Market Rules. In addition, the ASX Listing Rules regulates the conduct of ASX Listed Companies.
The National Guarantee Fund (NGF) provides protection for investors who deal via a broker in securities quoted on ASX or in derivatives traded on ASX’s derivative markets. Up until 11 March 2002, the operation of the NGF is set out in Part 7.10 of the Corporations Act 2001 (Cth). After 11 March 2002, the operation of the NGF will be set out in the Regulations to the Corporations Act 2001 (Cth). Investors can make a claim for compensation against the NGF for losses resulting from unauthorised transfers, or loss that results if a stockbroking firm becomes insolvent and fails to meet its obligations under the Corporations Act 2001 (Cth) or the ASX Market Rules.
(27) Keeping track of your investment : Information on shares and individual companies is readily available. You can track share prices and investment performance in most of the major newspapers, and additional information can be obtained from ASX, most stockbroking firms and, more recently, various internet sites. When you become a shareholder in a company, that company will send you, as one of the owners, a copy of its Annual Report.
(28) Understanding newspaper share tables
Newspapers provide daily information on share prices, sales and market movements. The format of newspaper share tables varies at the discretion of the newspaper. The following table is an example of one particular format. Shares are listed in alphabetical order according to the ‘name’ of the company. Industrial and mining shares are often listed separately.
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(30) External factors impacting on the sharemarket
As with any form of investment, there are a number of specific risk factors that will impact on how well your share portfolio performs over a period of time. Some of these factors relate to the company you are investing in or the industry it is part of; others are more broadly based.
Some industries have more peaks and troughs than others. Mining and resource companies, for instance, can be impacted by world commodity prices for their products, which, in turn, are affected by demand for those products. Other industries are more affected by the business cycle (eg building and construction).
The Australian economy relies heavily on exports, and the level of the Australian dollar can influence demand for exports and the performance of exporting companies. It can also influence demand for shares traded on ASX in general, since many overseas investors buy shares in ASX listed companies.
You also need to be aware that, to some extent, the Australian sharemarket is influenced by large overseas sharemarkets. A significant rise or fall on these markets may be reflected in the Australian market.
(31) Tracking the sharemarket using share price indices
In April 2000, Standard and Poors Index services assumed control of the index business formerly controlled by ASX. Significant changes were made to the All Ords and the other indices. Since that time the main market indicator has been the S&P/ASX 200. These indices are calculated by S&P in relation to the Australian sharemarket.
ASX All Ordinaries (or ‘All Ords’ as it is often referred to) is used as a measure of how the Australian sharemarket is performing. The All Ords share price index is based on the prices of the top 500 listed companies, weighted according to the market capitalisation of these companies. These companies represent approximately 99% of the domestic market capitalisation.
This performs a similar function as overseas exchange indices such as the Dow Jones (USA), Nikkei (Japan) and FTSE (UK).
As an indication of the growth in share prices, the All Ords was set at 500 points on 1 January 1980 and by 30 October 2005 it had grown to over 4,460 points. When there is consistent strong buying of shares, and prices in general are rising, it is called a bull market. When the share prices are steadily falling and look to continue that way, it is called a bear market.
(32) Sharemarket education to suit everyone
ASX Investor Education can guide you through an exciting and informative learning experience that will motivate and educate you on investing in the sharemarket.
Investor Education provides a variety of educational activities available for you to learn more about investing and to gain the confidence you need to assist in making informed decisions, whether you are novice or someone who already owns shares.
Free Online Education
There are other free courses available on www.asx.com.au covering options, warrants and interest rate markets.
ASX Investor Hours
Talks on various investment topics are held regularly at ASX and are presented by professionals within the finance industry. ASX investor hours will keep you up-to-date with current sharemarket topics. Admission is currently $5.00 including GST, and can only be paid at the door prior to entry to the lectures. We advise you to come early as admission is on a “first come, first serve basis” due to limited space at some venues.
ASX Sharemarket Game
If you a sharemarket novice, here is a great way of learning more about the sharemarket. If you already know the market, then this a chance to further test your trading skills. Further information can be found at www.asx.com.au/sharegame
ASX Services
www.asx.com.au
You can access a wide range of information on the sharemarket and other ASX markets at www.asx.com.au
You can view 20 minute delayed prices and company announcements, live indices and lots of other information about individual companies and the sharemarket.
Stockbroker Referral Service
Contact details of advisers from stockbroking firms who suit your requirements can be found by visiting the Stockbroker Referral Service at www.asx.com.au. You will be asked questions regarding your proposed investments so that ASX can provide contact details for a number of advisers to suit your needs. Alternatively you can contact ASX Customer Service on 1300 300 279.
Expos and Events
ASX provides an excellent program of investor education through the ASX Investor Seminar Series and specialist education for more advanced investors and traders. Visit www.asx.com.au/events for more information.
ASX Customer Service
Please contact ASX Customer Service on 131 279 ( for the cost of a local call ) if you would like more information on any of these or other ASX services.
(33) Other sources of information
Information is also available to the public from many sources.
Company information
prospectuses
annual reports
company reports
company websites
Stockbroking firm newsletters
Many stockbroking firms provide information on companies and investing in the sharemarket in regular newsletters to their clients. Further details can be obtained when you are ready to contact the firm of your choice.
Media information
Daily financial information is provided in all the major newspapers, and there are specialist magazines such as Business Review Weekly, Shares and Personal Investor, publications of Fairfax Business media and Money, a publication of ACP Publishing Pty Ltd.
Television programs such as Business Sunday (a program of the Nine Network) can also be a useful source of information, while some people find radio programs aimed specifically at investors can be worthwhile.
Specialist newsletters
Subscriptions to investment newsletters can also assist in making investment choices.
Internet
All the financial publications are also accessible via their internet sites. Membership usually entitles you to regular emails with links to the main stories in the current issue.
This is also true of a number of specialist internet information companies such as InvestorWeb and FloatNews that are worth investigating.
Many full service stockbroking firms and other financial service firms have Internet sites where you will be able to obtain useful information.
And, of course, the ASX website is a good place to seek market information or start a company search, amongst other things.
ASX Information Source Guide
ASX Market Data produces ASX Information Source Guide in an electronic format. This guide is specifically designed for investors, to help identify information distributors that provide the product or service that best suits your needs. Further information can be found at www.asx.com.au.
(34) Where to from here?
ASX courses
ASX provides an online education program in shares, options, warrants and interest rate securities.
ASX Investor Hour
For those who are interested in learning more, ASX Investor Education organises ASX Investor Hour lectures, which cover more specialist topics such as, reviews of various market sectors, current market trends and shares to watch.
(35) Glossary of share market terms
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AFMA
Australian Financial Markets Association (AFMA) is the national industry body representing the nearly 200 organisations who participate in the Australian over-the-counter (OTC) wholesale financial markets.
All Ordinaries
Measures the level of share prices at any given time for a sample of major companies listed on ASX to determine the overall performance of the sharemarket. Stock exchanges in other countries have similar indices, eg Dow Jones Index (New York), FTSE (London) and Nikkei Dow (Tokyo).
All Ordinaries (All Ords)
The index is made up of the weighted share prices of about 500 of the largest Australian companies. Established by ASX at 500 points in January 1980, it is the predominant measure of the overall performance of the Australian sharemarket. The companies are weighted according to their size in terms of market capitalization (total market value of a company’s shares).
All Ordinaries Accumulation Index
Takes into account both capital appreciation and dividends as a return on the companies in the All Ordinaries index.
annual report
In the context of the Australian sharemarket, the annual report is a financial report or statement issued by a publicly listed company to its shareholders. The annual report contains a statement of financial performance, a statement of financial position, a statement of cash flow, as well as notice of the Annual General Meeting (AGM) and business resolutions to be discussed.
at limit
An order that places a limit on either the highest price that may be paid for shares or the lowest price that may be accepted for sale.
at market
An at market order is placed at a price where the bid equals the best opposing offer, or the offer equals the best opposing bid.
BBSW
The Bank Bill Swap rate published by AFMA.
bear market
When share prices are falling and experts expect further falls.
bid
The price at which someone is prepared to buy shares (opposite to offer).
blue chip
Shares, usually highly valued, in a major company known for its ability to make profits in good times or in bad, and with reduced risk or default.
bonus shares/bonus issue
Additional shares issued by the company to existing shareholders for free, usually in a pre-determined ratio to the number of shares already held.
brokerage
Fee paid to stockbroking firm for buying or selling of shares.
bull market
When share prices generally are rising.
business cycle
Also known as the economic cycle. The rise and fall of the economy, from a peak, or boom, to a trough (sometimes called a depression) and back to a peak. The length and duration of each phase is not predictable.
capital
Funding for investment in capital assets or to operate a business. Also refers to the value of an investment in a business, or in assets such as property or shares.
capital gains tax
Tax on the profit from the sale of capital assets such as shares or property.
CHESS
ASX’s Clearing House Electronic Sub-Register System which provides the central register for electronic transfer of share ownership.
company report
Under Corporations Act 2001 (Cth), a listed company must provide a range of reports. These include half yearly reports, preliminary final reports as well as annual reports.
contract note
A written document confirming a transaction between two dealers or a broker and a client which details the costs, type and quantity of shares traded.
contributing share
Shares that have been partly paid for. At a future date the shareholder will be required to pay the balance outstanding, unless the company is a no liability company in which case shares can be forfeited instead.
conversion ratio
The conversion ratio is the number of warrants that must be exercised to require the transfer of the underlying instrument.
coupons
An interest payment that occurs 1,2 or 4 times a year.
deferred
Shares with the notation “d” are the result of a reconstruction of the company’s share capital.
delivery not enforceable
Shares quoted as “del” are the result of a new issue for which CHESS statements have not yet been issued.
diversification
Spreading investments over a variety of investment categories in order to reduce risk. You may also invest in different countries to spread your risk.
dividend
Distribution of part of a company’s net profit to shareholders. Usually expressed as a number of cents per share.
dividend imputation
The tax credits passed on to a shareholder who receives a franked dividend. Under provisions of the Income Tax Assessment Act, imputation credits entitle investors to a rebate for tax already paid by an Australian company.
dividend yield
The annual dividend shown as a percentage of the last sale price for the shares. A simplified rate of return on an investment.
equities
In sharemarket terms, equities is a synonym for shares and represent part-ownership of a company, as distinct from debt securities such as bonds and debentures.
face value
The amount at which securities are issued.
float
The initial raising of capital by public subscription to securities, such as shares offered on the sharemarket for the first time.
franked dividend
A dividend paid by a company out of profits on which the company has already paid tax. The investor is entitled to an imputation credit, or reduction in the amount of income tax that must be paid, up to the amount of tax already paid by the company.
GICS (Global Industry Classification Standard)
GICS was developed in response to the global financial community’s need for one complete, consistent set of global sector and industry definitions that reflects today’s economy and is flexible enough to change as the investment world changes. The industry groups under the GICS system are;
Consumer Discretionary
Consumer Staples
Energy
Financials
Financials excluding Property Trusts
Health Care
Industrials
Information Technology
Materials
Property Trusts
Telecommunication Services
Utilities
HIN
A Holder Identification Number is allocated by your stockbroking firm when you buy shares if you nominate them as your sponsor in CHESS.
Index
A measure of a change in value of underlying securities. For example the All Ordinaries Index.
investment
An asset acquired for the purpose of producing income and/or capital gains for its owner.
IRM
The ASX Interest Rate Market: where it is possible to buy and sell interest rate products such as corporate bonds, floating rate notes, convertible notes and hybrid securities.
limit
The price limit for an order, eg a bid of 300 means that the buyer is not willing to pay more than 300 for the security.
liquidity
Being able to convert assets into cash easily, quickly and with little or no loss of capital. A liquid market is a market with enough participants to make buying and selling easy.
listed company
A company which has agreed to abide by ASX Listing Rules so that its shares can be bought and sold on ASX.
market capitalisation
The total number of shares on issue multiplied by their market price. This can be applied to work out the market value of one company or of the value of all companies listed on the exchange.
market price
The prevailing price of shares traded on ASX. May be the last price at which the shares traded, or the most recent price offered or bid for the shares.
new
Recently issued shares are quoted as ‘new’ when they do not rank equally with existing shares in terms of dividends.
off-market transfer
The transfer of shares between parties without using a stockbroking firm as the intermediary. Off-market transfers are executed through the use of an “Australian Standard Transfer Form”.
offer
The price at which someone is prepared to sell shares (opposite to bid).
options
The right to take up certain shares on specified terms within or at a specified time.
price range for day
The highest and lowest price at which a share traded over the course of a day.
price-earnings ratio
Shows the number of times the price covers the earnings per share over a twelve month period. Investors commonly use this ratio to measure the attractiveness of particular shares and to compare shares in one company with those in another.
prospectus
The document issued by a company or fund setting out the terms of its public equity issue or debt raising. This provides the background and financial and management status of the company or fund, subject to the requirements of the ASX Listing Rules and the Corporations Act 2001 (Cth).
reweighting
This means changing the weight or percentage of the total portfolio which each investment represents. For example, an investor may invest their money equally in shares in four different companies. If the price of one share rises significantly more than the rest, the value of that share becomes much more than one quarter of the value of the whole portfolio. The investor may choose to ‘reweight’ their portfolio by selling some shares in that company and reinvesting that money in a different company.
rights issue
A privilege granted to shareholders to buy new shares in the same company, usually below the prevailing market price.
S&P/ASX Indices
The S&P/ASX indices measure the movement in share values resulting from trading on the ASX, and are constructed and calculated by Standard & Poor’s.
SEATS
The stock exchange’s automated trading system provided for the trading of securities on ASX.
SRN
SRN stands for security-holder reference number, which is allocated by an issuer to identify a holder on an issuer sponsored or certificated subregister.
stamp duty
Stamp duty is a tax on written documents (’instruments’) and certain transactions including motor vehicle registrations and transfers, insurance policies, leases, mortgages, hire purchase agreements and transfers of property (such as businesses, real estate or shares).The rate of stamp duty varies according to the type and value of the transaction involved. Depending on the nature of the transaction, certain concessions and exemptions may be available.Stamp duty on publicly listed marketable securities will be abolished from 1 July 2001.As requirements vary between States, organisations should seek clarification from their local State/Territory revenue office
technical analysis
Method used to identify investment opportunities through the study of price action. A chart representing past price movements, is the principle tool used to identify trends on which analysts can base their future predictions.
underwriter
An underwriter guarantees to the company that the funds sought will be raised and any shortfall will be taken up by the underwriter and the funds will be available at a specific time.
warrants
A warrant is a financial instrument issued by a bank or other financial institutions, which is traded on the Australian Stock Exchange’s equity market. Warrants may be issued over securities such as shares in a company, a currency, an index or a commodity.
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