Investment
Sharemarket basics
Investing in the sharemarket provides a way of participating in the future profits and growth of Australian and international businesses. In Australia, there are around 2,000 companies listed on the stock exchange, representing a total market capitalisation of around $1,487 billion*.
Shares listed on the Australian Securities Exchange are classified into indices based on their industry and size. Companies are divided into industry sectors based on the Global Industry Classification Standard.
Australian sharemarket sectors
| GICS Sector | Market weight** 30 November 2008 |
|---|---|
| Energy | 7.4% |
| Materials | 23.0% |
| Industrials | 6.5% |
| Consumer Discretionary | 3.6% |
| Consumer Staples | 9.4% |
| Healthcare | 4.7% |
| Information Technology | 0.6% |
| Telecom Services | 6.0% |
| Utilities | 1.8% |
| Property Trusts | 7.0% |
| Financials ex-Property | 30.0% |
** S&P/ASX 300 Index
Risk/return characteristics
Shares are generally considered a high risk and high return investment and are suitable for longer-term investors.
Historically, Australian shares have provided long-term growth well above inflation. At the same time, shorter-term sharemarket returns have been volatile at times.
Sharemarket investors can expect a negative return once in every five years, which is why shares are suited to longer term investors (seven years plus. Time greatly reduces, but does not eliminate, the volatility in returns from shares.
Sharemarkets move in cycles, reflecting the underlying strength of the economy, political factors, industry trends and market sentiment. On any given day interest rate and inflation expectations, company profits, dividends, economic growth figures and the rise or fall of our dollar can impact share prices.
Income and capital growth
While shares are primarily a growth asset, they can also provide a good source of income.
Most companies distribute a proportion of their profits in the form of dividends. Companies that pay high dividends tend to be blue chip companies like those in the banking, insurance and retail sectors. Some companies, like those in the mining sector or newer industries like biotechnology, may retain dividends to fund future research, expansion or exploration.
Actual yields can change dramatically from year to year and vary from company to company. If company profits are not growing, dividends are likely to be stable and if profits fall, a company may have to reduce dividends. Investing in a diversified imputation or high yield style fund can lessen this impact.
Tax benefits
Australian shares can provide tax-effective returns. According to the latest Russell/ASX Long-Term Investing Report Australian shares delivered the best after-tax and after-cost returns of all the asset classes over the 10 and 20 year periods to 31 December 2007.
Dividend imputation is the main reason Australian shares are so tax effective. Given companies have already paid tax at the company tax rate, investors can use franking credits to offset the amount of tax they pay on dividends. The higher the franking level the greater the benefit.
Some companies pay fully-franked dividends, with the maximum imputation credit of 30 per cent (equal to the company tax rate). Other companies pay partially franked dividends where the imputation credit will vary depending on the amount of tax they have paid on their profits.
International sharemarkets
Australian investors can access local and international sharemarkets. Investing internationally can increase your diversification and give access to industries and companies not available in Australia. Australia represents less than three per cent of the total world sharemarket.
For more on investing in international shares, read our investing overseas article.
Implementing your portfolio
You can invest in the sharemarket directly or via a managed fund. One of the major benefits of a managed fund is that you can access a much wider range of investments than you can investing directly yourself. Another is that your assets are professionally managed.
Index funds on the other hand, will include a broader range of securities holding all or most securities in the index. Many active Australian share funds hold between 30 and 70 stocks, out of a universe of around 200 to 300 securities depending on the index used. Some higher conviction funds hold less than 30 stocks.
* August 2008. Source ASX Getting Started in Shares