What are shares?

When you buy shares in a company, you are buying a part of that company. This means you share in the company's performance in the form of profits which can be given to you as dividends and/or capital growth through the value of your shares increasing.

The company you are investing in benefits by using your money and that of other investors to finance its business or its expansion, without having to borrow money.

Benefits of investing in shares

Outperforms other investments over the longer term

Although past performance is no indication of future performance, history suggests that Australian shares have outperformed other types of investment over the longer term.

Tax benefits

The performance of shares becomes even more attractive when tax benefits are taken into account. Where companies have already paid tax on their profits, tax credits known as franking credits may be attached to the dividends the company pays to you. These franking credits can be used to offset tax payable by you on other income. In addition, shares held for more than 12 months qualify for a 50% discount on any capital gains tax payable.

Diversification

Many people know the saying "don't put all your eggs in one basket". The Australian sharemarket helps you to do this by offering a wide choice of companies to invest in. There are over 1500 companies listed on ASX. These companies are involved in a wide range of industries covering most sectors of the economy including financial services, industrials and healthcare. By investing in a range of companies you can spread your risk.

Flexibility

You can buy and sell shares fast. You can sell shares and generally have access to your money in no more than three days. Other investments often take longer to sell and get your money back. This concept is known as liquidity. (Liquid investments have the benefit of greater flexibility).

Control over your financial future
You can decide exactly how your money is invested, enabling you to have a lot of control over your finances. You can of course choose to share this responsibility with a stock broker who can advise you on what shares to buy and sell.

What does it cost?

Trading shares has become much cheaper in recent years as stock brokers have made use of new technology to provide a better service to you. Buying and selling shares can cost as little as $30 for a transaction-only service. You may need to pay more if you want advice and/or access to research on a company.

What risks are there?

Although the sharemarket historically has outperformed other investments over the long term, the market can experience volatility in the short term. Individual stock prices can go down as well as up. It is important to monitor your shares' performance, and to regularly re-evaluate whether they continue to be a good investment for you.

Call options and put options defined

There are two types of options traded on ASX, call options and put options.

Call options
Call options give the taker (buyer) the right, but not the obligation, to buy the underlying shares at a predetermined price on or before a predetermined date.

To acquire this right the taker pays a premium to the writer (seller) of the contract.

Put options
Put options give the taker (buyer) the right, but not the obligation, to sell the underlying shares at a predetermined price on or before a predetermined date.

To acquire this right the taker pays a premium to the writer (seller) of the contract.

In order to take up the right either to buy or to sell the underlying shares, the taker must exercise the option on or before the expiry date of the option contract. If the option is exercised, the shares are traded at the specified price (the exercise or strike price).

It is important to note that the taker of the option is not obligated to exercise the option. The taker can sell the option, or alternatively let the contract lapse.

Futures defined

Futures are contracts to buy or sell a particular asset (or cash equivalent) on a specified future date.

Around the world, futures contracts are traded over commodities such as gold, wool and soybeans, financial instruments such as government bonds and currencies, and equities.

On ASX, futures contracts are traded over three sharemarket indices, the S&P/ASX50 Index, the S&P/ASX200 Index and the S&P/ASX 200 Property Trusts Index.

When you buy an ASX Mini Index Future, you agree to 'buy' the index underlying the futures contract on a specified date in the future. When you sell a future, you agree to 'sell' the index at that time. At maturity of the contract a cash settlement takes place. Whether you make a profit or loss at maturity depends on how the index has moved in the period since the futures contract was traded.

The full value of the futures contract is not paid or received when the contract is established. Instead both buyer and seller pay an initial margin, which is a small percentage of the value of the contract. The traded price is the basis on which profit or loss is calculated at maturity or on closing out the position if this takes place before maturity.
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