Shares 2.0 Researching, Buying and Selling
This episode follows on from our first share market episode (Episode 2 Let’s Chat Shares). We delve deeper into researching companies, dividends, actually purchasing shares and the difficult part- selling. Thanks goes again to Chris Titley, Stockbroker from Morgans, for answering all of our questions.
Researching: Where’s the best place to get reliable information?
Once upon a time you would go directly to your stockbroker. However with smartphones, laptops and Google at our fingertips we now have a wide range of options. You would probably start by looking at the Australian Stock Exchange (ASX) for company announcements. Then you have other websites such as Bloomberg and Yahoo Finance where you can get all the company background information. On top of this there is mainstream press, for example the Financial Review, Sydney Morning Herald or The Australian. The best source really is probably from the company itself, so if you even start with a google of the company name + ‘research’ you should be able to find a lot of info.
Say you have done your research and worked out what company you want to buy into, what price do you bid at?
You can essentially choose to bid for shares at the market price or allocate your own price or price limit. If you are bidding less than the market price, you essentially have to wait for the price to drop down. Some say it’s a bit of art and a bit of luck as to whether you will get it or whether the price will increase and you miss out. What you need to think about however, is say the market price of a share is at $34...whether you buy it at $34.02 or $39.98 shouldn’t really matter if you have made the decision that you are confident in the company. Some tools to understand what price a share has been trading at is to look at the amount of shares bought and sold that day, as well as the daily high, low and opening price (These are all shown on the site you are purchasing your shares on e.g. Commsec).
Dividends: what is a dividend and why do some companies offer them?
If you look at the return of a share, a dividend is one part of it. It is essentially the after-tax profit that a company chooses to send back to shareholders as a reward. Consider it like owning an investment property, the rent you get from tenants is like the dividend you get from shares, it’s a form of income.
Franked vs. Unfranked Dividends
Franking is a term which allows a tax credit to the individual shareholder because the company has paid Australian Corporate Tax. So you will receive a dividend in the form of an income and then you will get a credit, which will help you at tax time. Essentially, you offset some of your tax because the company has already paid it. If it is ‘fully franked’, you receive 100% of the tax paid on the dividend as franking credits. Unfranked dividends are those that are paid before tax, there are no tax credits attached to them.
How do you know which companies pay high dividends?
When you look at the company research (on ASX, Commsec etc.) there will be a financial indicator called ‘dividend yield’ which is the dividend they pay against the current share price.
What is a DRP? (Dividend Reinvestment Plan)
A DRP is where the company allows people to reinvest their dividends back into the company’s shares (only about 25% of companies do this). So if you were receiving $100 in dividends, you would instead receive $100 of shares. This would be beneficial if you were a long term investor and wanted to purchase more shares in that company. However some people believe they would either prefer to take the dividends as cash for spending, or allocate the money themselves into another investment.
Selling Shares: When do people sell?
This is the really hard part. People sell for all sorts of reasons. It might be to purchase a house, go on a holiday, or to reinvestment somewhere else. So selling can be driven by time (you need the money), greed (you’ve made enough on your money and you’re ready to pull out) or alternatively you don’t sell and see what happens. Evidently holding on to your shares could go two ways. 1) they keep going up in value, 2) they keep going down in value. Regardless, both depend on people’s personality and level of risk as to when they will sell.
That’s all we have time for (looks like we will need a Shares 3.0 Episode). Get in touch if you have any share-related questions from this episode.