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Sharemarket Basics SHAREMARKET SHAREMARKET Fundamental Analysis


The purpose of this guide is to explain how the sharemarket works and sharemarket jargon. It is
not intended as investment or taxation advice.

This article is copyright. You may print it for your own personal use. Please do not distribute it.
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Working Your Money by Lorraine Graham, published Feb 2001 by Wrightbooks. Available from
general bookstores or direct from Wrightbooks at

This book covers the basics of investing in fixed interest securities, property and the sharemarket
and explains why you may not be able to rely on superannuation to live well in retirement.

Fast Track Your Mortgage by Lorraine Graham, published Aug 2002 by Allen and Unwin.
Available from general bookstores or direct from Allen and Unwin at

How to save thousands of dollars on mortgage payments and use what you save to fund your
Buying blue chip shares and holding them for long lengths of time is a safe way to make a
respectable amount of money. You don’t have to be a screen cowboy or trade options or futures
to make money from shares.


In Australia, companies can be private or public, and public companies can be listed or unlisted.
Private companies and unlisted public companies are normally owned by an individual, a family,
a group of people, or another company. Listed public companies are owned by shareholders and
anyone can buy shares in any listed public company. A stock exchange is a market where
shareholders can buy or sell their shares. There are around 1400 listed companies in Australia.

Most public companies started life as private companies. Changing from a private company to a
public company is called floating the company. The owners of the company offer some or all of
their shares for sale to the public, and they may issue additional shares to raise more capital for
expansion or to retire debt.

With the privatisation of public utilities, such as Telstra, the Government gets the money that the
shareholders pay to buy the shares.

Once a company has been floated, shareholders can sell their shares to someone else on the
Australian Stock Exchange, usually just called the ASX. Shares are valued by investors
according to the value of the assets the company owns and the dividends that the company is

Shareholders are the owners of the company although they are not involved in the day to day
management. The company is run by directors, who oversee the management and represent the
interests of the shareholders. Directors are normally appointed by the shareholders at the Annual
General Meeting of the company.


To buy and sell shares you need to go through a stockbroker and you will pay brokerage charges,
usually around 2% with a $100 minimum. This can be reduced to 1% with a $50 minimum if you
go through a discount stockbroker, and around $30 if you trade over the Internet. A discount
stockbroker will execute your orders, but will not give you advice on which shares to buy like a
normal stockbroker will.

Most stockbrokers now have an Internet webpage and many brokers will allow you to trade
shares online. There are lots of sites with free information about companies and share prices, and
forums to exchange news and ideas on which stocks to buy. Do a search on Australian
Sharemarket to find current web addresses.
You will need to buy shares in minimum lots of $2,000 to $3,000 or the brokerage will be too
high a proportion of your investment. Some brokers will not deal in amounts below $5,000,

Many small investors who go into the Sharemarket don't realise just how volatile share prices can
be. Sharemarket books (like Managed Fund Brochures) are always full of optimism, vast returns,
easy profits, and graphs that climb steeply and steadily up to heaven.

There are a lot of excellent books on the Sharemarket, and there are various strategies for making
money. The most reliable strategy is to buy blue chip shares in large companies and hold them
for a long time. You will do even better if you can buy the shares at times when either the market
in general is low, or the particular share price is low, because the company is out of favour for
some reason. This is not an easy thing to judge, particularly for beginners, but if you try to
choose a time when the All Ordinaries Index is 10% or more below its previous high level, or the
particular share price is 10% or more below its previous high, you will at least be on the right

Contact the ASX in your State if you need help finding a suitable Stockbroker. They also have
investment guidebooks available.


You can keep track of the value of your shares through tables in newspapers, on Teletext, or on
the Internet.

Here are some of the figures that are available for shares.

Buy and Sell Prices, Last Trade
The last trade, fairly obviously, was the last price the share traded at. The buy price means there
are buyers waiting to buy the shares at that price. The sell price means there are sellers waiting to
sell shares at that price.

If you want to buy shares, you can either buy some waiting to be sold at the sell price, or you can
put in a bid slightly lower than this and wait until someone wants to sell at this lower price. If
your bid is the same as a buyer already on the list, your order sits behind theirs. If it is higher than
any other bid on the list, yours will be at the top, and you will get the next shares that are sold at
that price. Your broker will help you to decide whether to buy at the current selling price or put in
a bid at a lower price and wait. The same thing happens when you sell. You can either sell to a
waiting buyer, or put your shares on to sell at a slightly higher price, hoping someone will want
to buy them.

The broker sees a list on the computer of buyers and sellers, similar to the (fictitious) example
below. This list is called the Market Depth of the share. This example will make it easier to
follow what happens when you place an order.
      BWT          BENTWOOD TIMBER COMPANY                            Last Sale    3.07
           Level     Buyers      QTY (B)       BID         ASK       QTY (S)      Sellers
            1           1           10 000        3.05        3.08      20 000      1
            2           2          300 000        3.03        3.10      50 000      3
            3           1            2 000        3.01        3.15       4 000      1
            4           3           56 000        3.00        3.20      80 000      1
            5                                                 3.50      10 000      1

For this company, there is a buyer who wants 10,000 shares at $3.05, two buyers who want a
total of 300,000 shares at $3.03 and so on down the Bid list. The lowest seller currently wants to
sell their 20,000 shares for $3.08. Three other sellers are prepared to sell their shares for $3.10.
The buy price would be $3.05 and the sell price $3.08 in the share tables. The last sale was $3.07.
This order has gone through, so the buyers and sellers are no longer on the list.

If you want to buy shares in Bentwood Timber, you have three choices.

            You can pay $3.08 and buy some or all of the 20,000 currently offered.

            You can put in a bid for say $3.06 and hope someone will want to sell for that later.
             The bid for $3.06 would be at the top of the Bid list until someone decided to put in a
             higher bid.

            Or you can choose to put your bid anywhere else in the queue. You may only be
             prepared to pay $3.00, in which case your bid would be behind the other $3.00 bids at
             that level in the queue.

If there were losts of investors wanting to sell that day, the buyers above you may get their shares
and leave the queue and you might get yours for $3.00. However, if a buyer came and bought all
the shares at $3.08, after some good news was announced by the company that day, and the share
price continued to rise, you might then have missed your chance to buy at $3.08.

If you did manage to get your shares for $3.00 later in the day, you could then put them on the
sell queue at say $3.60 if you wanted to, and wait until the share price improved and yours sold
for $3.60. The order can stay there for as long as you like. (Although some brokers do have a
time limit on leaving orders placed through them.)


The share tables may also give you some or all of the following:

Net Asset Backing
This is the amount per share you would have if the company was wound up and the assets of the
company were sold at their book value.
Dividend Yield
This is the percentage return of the dividend for the current share price. This does not include the
value of any franking credit.

Price to Earnings Ratio (P/E)
A P/E of 10 means that the share price is ten times the amount of profit per share made by the
company in the last year. If the share price is $1.00, the company profit would be 10c for every
share. If the whole 10c was paid as a dividend, you would get a 10% return. If the company
retained half its profits, and paid the other half to shareholders (5c), you would get a 5% return,
and the assets of the company (and hopefully the share price) would go up by the other 5c.

Plus or Minus
This is the amount the share has gone up or down since the previous day, usually in cents.

Volume, Day’s High and Low
These values give the number of shares traded that day, the highest price the share traded at, and
the lowest price for the day. Most tables give volume, only some give the day’s high and low.

Year High and Year Low
Most tables give the highest and lowest price the share has traded at for the year. Some tables
give this for the calendar year from 1st January. The more useful ones give it for the last twelve

The All Ordinaries Index
This is a measure of the day to day value of the top five hundred companies that trade on the
ASX. The All Ords varies from day to day depending on the price of the shares which make it up,
but over the years it rises steadily and acts as a measure of the return on investment for the
sharemarket. The All Ords only reflects the price of the shares, not the dividends that are paid, so
the overall return of the sharemarket is the increase in the All Ords, plus the dividends received.
There is another index, called the All Ordinaries Accumulation Index, that measures both the
price increase and the dividends paid. This index represents the value of the shares in the All
Ords if all dividends were reinvested.

When the All Ordinaries Index is high, most share prices are high and we have a Sharemarket
Boom. When the index drops, share prices have dropped and we have a Sharemarket Crash. A
period when share prices are generally increasing in value is called a Bull Market and a time
when share prices are dropping is called a Bear Market. Keep in mind that the All Ords is just a
measure of the price of the shares that make it up. Changes in the prices of the shares affect the
All Ords, rather than changes in the All Ords affecting the share prices.
Market Capitalisation
The market capitalisation of a company is simply the share price multiplied by the total number
of shares on issue. It represents the total value that investors have placed on the company. It is
not in any sense the real value of the company, however, except in a takeover. If everyone
wanted to sell their shares, the share price would drop. The share price really only represents the
value to investors of the pool of shares that are currently available to buy or sell.


Sometimes a listed company will take over another listed company, and will offer to buy all the
shares in the company from the existing shareholders. The offer may be in the form of cash,
shares in the company doing the takeover, or a combination of both. The price offered is usually a
premium to the current market price, to encourage shareholders to accept the offer.

If a company gains 90% of the shares of the the target company, it can compulsorily acquire the

Takeovers can be friendly or hostile and may be done to improve efficiency, extend geographic
area or just to reduce competition.


The company profits can be paid out to the shareholders as dividends or retained by the company
to pay debts or fund further expansion.

Some companies allow you to reinvest your dividend in extra shares in the company, usually at a
small discount to the current market price. You still have to declare the dividend as income and
you can still use the attached tax credit. The company benefits by having a continual supply of
extra capital for expansion or debt reduction.

Shares go ex-dividend on a date specified by the company, usually around three weeks before
the dividend is actually paid to shareholders. The books close or record date is around three
days later to allow for all transactions up to the ex-dividend date to be processed on the share
register. If you buy shares before the ex-dividend date, you are buying them cum-dividend and
you will receive the dividend even if you then sell your shares before the date the dividend is
paid. If you buy the shares on the ex-dividend date or later, you do not get the dividend, even
though you will own the shares on the dividend pay date. The share price will normally drop
slightly when the shares go ex-dividend.


Some share dividends are called Franked Dividends and have some tax credit attached to them.
The tax credit is also called Imputation Credit.
If a company makes $100 profit, the company currently pays $30 of this in Company Tax and the
remaining $70 to the shareholders.

If a shareholder is on the top tax rate, and pays tax at 48.5%, then $34 of the $70 dividend would
be owing in tax. This would mean that for every $100 profit the company made for the
shareholder, $64 would go to the Government and only $36 to the shareholder.

Franking Credits were introduced to overcome this double taxation of profits.

The dividend of $70 is paid to the shareholder with a franking credit of $30 attached. This is the
tax the company already paid on your share of the profit.

If you receive a franked dividend from a company, you need to declare both the dividend and the
franking credit in your income. This would be the $70 and the $30, giving $100. The franking
credit of $30 will then be deducted from the total tax you owe. The TaxPack will explain where
to put these amounts on your tax return.

For taxpayers on a marginal rate less than the company tax rate, any excess franking credit can be
used to pay other income tax, and from July 2000 any unused credit will be refunded.

If a lot of your income is from shares with franking credits attached, you may not pay very much
tax at all. This is a benefit of sharemarket income, particularly after you retire.

There is a special rule relating to Franking Credits called the Forty Five Day Rule. If you want
to claim the franking credit, you must own the shares for a single forty five day period that
includes the record date of the dividend. This forty five days does not include the day you buy or
sell, so it works out to forty seven days altogether. If you have less than $5,000 for the year in
franking credit, the rule does not apply.

Always check the current tax rules and values with the ATO or a tax advisor.

Keep all the statements the company sends you, so you have a record of the dividend and the tax


Property Trusts have special tax arrangements, as part of your dividend will normally be tax free
or tax deferred.

The Trust will send you a statement at the end of the year with instructions for filling in your tax
return with the different income components, so don't panic and think this is too complex for you.
Just follow the instructions carefully. Consult a Tax Agent or telephone the Trust or the ATO if
you are not sure what to do. Keep all your statements together so you have them available at tax

Here are some income components you may have. Your Fund will tell you where to put each bit
on your return.
     Tax Free income is normally a building depreciation component, and need not figure on
      your tax return at all. When you sell your units, this amount is used in calculating Capital
      Losses, but not Capital Gains. This treatment of building depreciation is currently under
      review, and there are plans to treat this income as tax-deferred.

     Tax Deferred income from plant depreciation and capital gains made by the fund reduces
      the cost base of your units, so it adds to the Capital Gains Tax you pay when you sell the
      units, but you don't pay tax on it at present.

       From 2001, some of your income may be capital gain, and this may be at a concessional
        rate. Follow the directions from the company for the tax treatment of this component.

     The remainder of your income is just normal investment income.

     Any Franking Credit must be added to the taxable income and can be used to reduce any
      tax you owe.

You do not normally get franking credits from property trusts, as the trust does not pay tax.
However, if you are in a trust that invests in shares as well as property or earns some investment
income, you may have some franking credits included with your dividend.


Bonus shares are sometimes issued to shareholders, so you may get say one extra share for every
ten you own. Or the company may have a share split, where each old share is replaced by a given
number of new ones. The company still owns the same assets and pays the same amount in
dividends, except that now the assets and dividends are spread over a larger number of shares.
The price will go down to reflect this, although often not as much as you would expect.

Share splits are often used for shares that are trading at a very high dollar value (eg around $40).
Investors tend to think that high priced shares are expensive and unlikely to go higher, and are
more comfortable buying shares at less than $10. This is the main reasoning behind share splits.
It also makes reinvesting dividends more attractive. If your dividend from a company is $20 and
the shares are trading at $40, the company can't issue you with half a share. In this case they save
over the fraction to the next dividend, or pay you in cash.

Shares are occasionally amalgamated. You may be issued one new share for every ten old shares
for example. The share price will increase when the new amalgamated shares are traded.


Companies can issue new shares in a number of ways. They can issue them, usually slightly
below the current market price, to institutions, large individual investors or to clients of a
particular stockbroker. A company can issue up to 15% of their existing number of shares in any
given year in this way. If the share issue is then ratified by the shareholders at a shareholder
meeting, the company is free to issue 15% of the capital again even if it is in the same year.
Companies can also offer new shares to existing shareholders. This is called a rights issue, and
usually involves a higher cost to the company than issues to institutions. Shareholders who own
shares at a set date are issued with a right to buy a share at a given price before a given date,
usually at a discount to the market price (otherwise no-one would buy them!). If you don't want
to buy the shares, you can sell the rights to someone else if they are renouncible rights. The rights
trade like a share for a few weeks before the new shares are paid for and issued. If a rights issue
is pending, you can buy shares cum-rights or ex-rights, just as you can buy them cum- and ex-


Options are sometimes issued by companies, and these trade on the ASX just like a normal share,
but you don't receive the dividend you would get if you owned the share. You are buying the
right to buy a share in the company at a specified price before a specific date. If a share rises in
price, the option usually rises by a higher proportionate amount, so you make more profit.

For example, if a share is trading at 15c, an option to buy that share next year at 20c may be
trading at around 3c. If the share price doubles to 30c, the price of the option may rise to 12c or
so. So you will have made four times your initial investment. Options are particularly useful if
you want capital gain rather than income.

If the option is soon to expire and the underlying share is less than the strike price of the option, it
is pointless exercising the option to buy the share and the option will expire worthless. For this
reason company options are more speculative than buying the underlying shares.


If you make a profit when you sell shares, you will need to pay Capital Gains Tax. If you make a
loss, you can offset this against other capital gains in the same or future years. You cannot claim
a capital loss against your normal income.

Assets bought prior to September 1985 are not subject to CGT, and you can still use the older
indexed method if you want to for shares bought prior to September 1999. There is an ATO
booklet available on CGT with details of the old method.

You calculate the capital gain as the net money you received after brokerage when you sold, less
the total cash cost to you including brokerage and any bank fees or debits tax charges. This is
your total capital gain or loss.

If you have a gain on shares you have owned for more than one year, you pay tax on only half of
the capital gain at your normal marginal rate. If you have held the shares for less than one year,
you pay tax on the whole gain.

Capital losses can be used to offset capital gains. You must use the full amount of the capital
gain, before you halve it. Any extra loss can be carried forward to offset capital gains in future
You can offset the losses against the gains in any order. If you have gains you made in less than
one year, offset these first, so you still get the benefit of the halving on the gains made on shares
held for more than one year.


Shares are priced by the market according to

      the value of the assets the company owns
      the profits the company makes and the dividends the company pays
      the stability of the income of the company
      whether investors expect the company earnings to grow over time
      the perceived quality of the company management
      the prospects of the company in the current economic environment

Sometimes companies or even whole industries, move in and out of fashion. At the height of the
tech boom, investors were paying silly prices for shares in companies that had never made profits
and were unlikely to ever make profits. Many of the companies eventually failed.

Share prices also depend on current bank interest rates. If you can get a 5% dividend on a blue
chip share, and term deposit rates are 4%, the share is more attractive and the price will increase
with more demand for the shares. If you can get 12% in a term deposit, the share paying 5% will
be less attractive and the price will drop to a point where the return is higher.


Try to diversify your investments over different shares in different market sectors, such as
banking, transport and retail. Be prepared for a lot more volatility in prices than you would get in
a Managed Share Trust. A Share Trust invests its shareholders’ money in a range of other
companies, and is an alternative to directly investing in shares yourself.

If you had bought only Commonwealth Bank Shares in November 96, when they were $11.98,
you would have returned over 50% by November 97, and 100% by November 98. You would be
glad you hadn't settled for the average 15% return of a Share Trust.

If you had bought BHP, however, at $18.02 in November 96, you would have lost nearly 25% by
November 97, and around 35% by November 98. If you had bought BHP, you might find the
average return of the Share Trust much more attractive. BHP did recover after this, of course and
is trading at around $21 (prior to share split) at the time of writing this in June 2001.

These two examples are just to show you how variable returns can be on individual shares. If you
had put all of your money into BHP, you would have made a loss over the two years in the
example. If you had bought only Commonwealth Bank, you would have done very well indeed.
If you had bought some of each, you would have reduced both the potential loss and the potential
As two extreme examples, HIH Insurance and Harris Scarfe Holdings recently failed in rather
spectacular circumstances. Both looked like perfectly safe investments only days before they
failed, with a high asset value compared to the share price and a history of always paying
substantial dividends.

There is a lot of luck as well as skill in picking winning shares. The actions of the company and
the economy are outside your control. Diversification protects you from losing all your money on
a failed share, but reduces the possibility of making a huge return. The more shares you own, the
closer will be your return to the market average. The market average, however, is a respectable
13% or more over the long term. Try to aim for at least ten different companies, so only 5% to
10% of your money is in any one company.


You will make money if you buy shares from a range of the top 100 or so companies and keep
them for long lengths of time. Probably more money than you could easily make in any other sort
of investment. The dividends often have some tax already paid on them, so you keep a greater
proportion of your return, and share prices go up, on average, over the years, so you will also
have a Capital Gain on your investment, which is taxed at a concessional rate if you sell. If you
keep the shares through your retirement, you will never pay the CGT in your lifetime. You will
not be paying ongoing fees to Fund Managers to run your investments, so in the long term your
average return should be better.

Personal Investor Magazine lists the top 300 companies each month, and the Australian Stock
Exchange has an Investor Handbook with details of the top 300 or so companies. Never assume a
share is safe just because it is on the list. Look for shares with a history of always making profits
and paying dividends and with low levels of long term debt. If in doubt, consult a stockbroker.

There are Managed Funds that deal in shares, and you can invest in these rather than directly in
the sharemarket if you prefer. There are also Share Trusts that are listed on the ASX. When you
buy shares in a Share Trust, you are buying a small portion of a range of other companies, so
there is some built in diversity. The advantages Managed Share Funds and listed Trusts have
over individual investors is that they can invest in a wider range of companies, and the fund
managers always have access to the latest company information. However carefully you do your
research, there is still a good deal of chance involved in selecting shares.

A basic investment strategy is to buy quality shares when the market is low or when the
particular share price is low for some reason. There are often opportunities to buy blue chip
shares at low points. Look at the price to earnings ratio, the amount of debt, and the stability of
returns from year to year. There are books available on fundamental analysis to help you in
company selection techniques, and some stockbrokers do research on companies and recommend
shares that they consider undervalued. You can also use technical analysis (charting) if this
appeals to you.

If you would rather just invest in the sharemarket generally and have someone else stock-pick for
you, buy shares in a listed sharemarket trust or a managed fund. This is a quite respectable way to
invest, and you can still enjoy following markets and share prices. Your fund will give you a list
of the companies that they (and you) own.

If you buy shares that pay a reasonable dividend and the Sharemarket crashes, you do not need to
sell your shares or worry about the lower share prices. If the company makes the same profits,
you will receive a similar dividend, regardless of the market value of the shares. This also applies
to units in Listed Property Trusts. The day to day value of the units does not matter if the income
is the same. The Sharemarket always goes back up past its previous peak.


Every investor dreams of buying an obscure small company and watching the share price go up
ten times in two or three years. This is speculation, not investment, but can be fun. Choose
companies with some sort of fundamentally useful product, low debts and good management.
Don't put more than 10% of your funds into speculative shares. Your long term returns may be
good, but expect some ups and downs along the way. You might prefer to invest in a Trust that
deals in small emerging companies. Fund managers can talk to company directors and look over
factories before they buy the shares. You are unlikely to have access to such first hand


Trading Shares is even more fun, but don't put too much of your savings into it. There are
methods here, too, but this is much closer to betting on horses using a system than it is to
investing money. Read some books about share trading strategies before you jump in, and
practise without actually buying shares for six months or so.

A basic system is to sell a share if it goes down 20%, but to keep the ones that go up until you
have made more than this. Then you only need to pick winners half the time to come out on top.
In theory! Sometimes shares fall so quickly that you don't get time to sell when they drop 20%.
They are way below that before you realise they are even going down. And shares have an
annoying way of going through the roof the day after you sell them for a small profit, or dropping
through the floor the day after you buy them. They do for me, anyway. But they are fun, and just
once in a while you get a win. Often enough to keep you in the game.

There are Chartists, who swear by their methods and often get excellent results using them. There
are various theories about whether charting works and why it works. If the idea of graphing
things appeals to you, find a book on charting and have a go.

There are others who see charting as akin to reading tea-leaves and would rather choose
companies on their fundamental assets, earnings and management. These Value Investors look
for small companies that have the potential to become big companies. They also look for blue
chip shares that are out of fashion for some reason and buy while the price is low. They argue
that in the long run, a share will find its correct price to reflect the value of the company.

There are often excellent opportunities to buy blue chip shares at low points due to reasons
unrelated to the performance of the company. You can then sell the shares when market
sentiment has improved and the share price has returned to its previous peak. If you look at a
graph of the share price of almost any blue chip company you will see a trading range with peaks
and troughs. If you buy the shares at a low point and sell at a high point a few months later, you
can make a gain of 10% to 20% on a very safe share. This will not give you vast profits, but it
will give you a better return than a buy and hold strategy.

There may be people other than stockbrokers who make a living trading shares. There are
certainly people who make a living selling share trading secrets and share trading systems to
other people, or writing books about share trading systems. Would you sell the secret of a really
successful share trading system to someone else, or would you keep it to yourself so you were the
one making money from it? You can pay over $20,000 for a course on sharemarket tactics. Buy a
$30 book instead.

Most successful share traders have access to online computer systems giving the latest share
prices and company information. These online systems were once expensive to install and run,
but now live prices and live news can be obtained free or for a small cost on the Internet.


Before you rush in and choose shares to buy, read some of the books on sharemarket investing
currently available. Wrightbooks at have an excellent selection of
books on share investing and trading that you can buy online.

Buy or borrow a couple of issues of Shares magazine and read them in detail, including the ads
for brokers and share websites. Don't spend money on share trading software at this stage, or
expensive subscription newsletters. After a few months you will be better able to judge if (and
which of) these products would be useful to you.

Follow the sharemarket for several months so you get to know the range that shares trade in.
Many new investors find the risk of losing money is far higher than they imagined. Pick out some
particular shares, pretend you bought them and follow them for a few months.

Ring around a few stockbrokers and check the services they offer and look up some online
trading sites. Join a couple of share forums and read the posts (and the disclaimers). Subscribe to
one or two free sharemarket news email services. Get used to the terminology and the market

You will have a lot more confidence investing if you know the basics.


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