Getting your start in the sharemarket

Geoff Walker wanted to invest in the sharemarket but didn't know a lot about how the market worked or about investment strategies. So he started off by buying shares in a listed investment company, a type of managed fund. This allowed him to observe a professional share investor at close quarters and gain some understanding of how it was done.

When Walker, a retired actuary, felt he had enough confidence he started buying his own stocks. "When I started investing in shares 30 years ago I followed stock tips and usually got my fingers burnt. I knew there had to be a better way."

Almost half of all adult Australians own shares - that's more than seven million people, according to an Australian Securities Exchange survey. However, the research company Investment Trends estimates that fewer than one million of those people are active, which means that they have traded shares in the past 12 months.

Most people buy some shares and then leave them in the bottom drawer for years. Some are happy with the portfolio they have put together and are content to leave things as they are. But many sit on their holdings because they feel they don't have the skills to make trading decisions.

Anyone planning to get into share investing needs a plan, like Geoff Walker's, to acquire some understanding about how the market works. They can do this by joining a group like the Australian Shareholders' Association, which runs regular education sessions for its members. The Australian Securities Exchange runs as series of online and face-to-face seminars, which are listed on its website. And some online brokers offer seminars.

Shares are volatile

Of all the popular asset classes that people invest in, shares are the most rewarding but also the riskiest. According to the investment research company Morningstar, the Australian sharemarket index has gone up by an average of nine per cent a year over the past 20 years – more than property, bonds or cash.

But shares have down years more often than any of the other major asset classes. A share portfolio can be expected to have a down year every one in three or four years. Investors who don't like losing money should not have all their money in shares.

The other thing to note about shares is that companies are not required to pay dividends. Many investors hold banks and other companies that pay high dividend yields but they need to recognise that it is up to the director to decide whether to pay a dividend.

Choose your broker

Anyone buying or selling shares must have a broker because that is the only way share trades can be settled. When it comes to choosing a broker, there is a full service model and an online model. Most full service brokers prefer clients to have a substantial amount (in some cases more than $1 million) available to invest in the market. Online brokers are open to anyone and they are much cheaper than full service brokers.

The drawback with online brokers is that there is no one to hold your hand. However, most of the online brokers offers research services and some offer seminar programs and other investor education services.

Dividend income can be tax effective

The dividend imputation system gives shareholders a credit for the tax already paid by the company. This makes dividend income a good source of tax-effective income.

The Australian Taxation Office looks at a dividend this way: assuming that the company is paying the full rate of corporate tax (30 per cent) a dividend of $100 would be assessed as income on which 30 per cent tax had already been paid.

If the shareholder’s marginal income tax rate is 32.5 per cent (the rate that applies on income between $37,001 and $80,000 a year) there is only a small amount of tax to pay on the dividend – the 2.5 percentage point difference between the shareholder's marginal rate the company tax rate.

Direct or indirect?

Investors can choose the companies whose shares they want to own and then go to a broker to buy them, or they can invest in a managed fund. Managed funds come in a variety of different forms – listed or unlisted, active manager or index-based manager – but they all have one common feature: they charge a fee for making the stock selections on behalf of investors.

Since the financial crisis managed funds have been out of favour because they have struggled to produce good returns in volatile market conditions and their fees have eroded much of the return they have produced.

However, a good quality managed fund may be a sensible option for investors who do not have time to commit to their portfolios.

The story Getting your start in the sharemarket first appeared on The Sydney Morning Herald.

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