share-trading

What is share trading and how does it work?

Information verified correct on December 7th, 2016

Start here if you know nothing about share trading.

Share trading is a way to build wealth. When you trade shares you’re buying and selling a portion of a company on a share market (or a stock exchange).

Each share has value. The value of a share is determined by the company’s present performance. Future performance can impact share price as well. You can make money when a share price increases and you sell your shares, and when a company pays a dividend.

What is the stock market?

Also called a stock exchange, a stock market is the place where investors trade shares. Australia is home to a number of exchanges. Stocks in the biggest companies in Australia and the world are traded on the Australian Securities Exchange (ASX) and CHI-X. You can also trade on international exchanges such as the New York Stock Exchange (NYSE).

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Rates last updated December 7th, 2016

How can you make a profit from share trading?

Share trading is a way to create wealth. There are three ways to make money from share trading: capital growth, dividends and tax concessions.

Capital growth

The most common way to make money from share trading. This is simply when you sell shares for more than you paid.

Dividends

This is when the directors of a company choose to pay company profits to shareholders. Dividend payments are based on the number of shares you own. These types of shares are called income shares. Not all companies pay dividends, and directors can reinvest profits to grow the company rather than pay a dividend. These types of shares are called growth shares.

Tax benefits

A share can be fully franked. This is a term to describe when a company has already paid tax on your dividends. You can use franking credits to reduce the tax you pay on other income.

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What are the benefits of share trading?

Share trading can make you money in the short term and the long term, plus they present tax benefits for investors.

    • Liquidity. Shares are a liquid investment. You get your money two days after you make a trade.
    • Capital growth. Shares have proven to be a solid investment for long-term capital growth.
    • Tax. You may be eligible to receive a discount on any capital gains tax if you’ve held the shares for more than 12 months.
    • Shareholder rights. When you become a shareholder, you can vote on company decisions and attend annual general meetings (AGMs).

What are the risks of share trading?

Share trading is a way to make money. Generally speaking, the greater the potential gains, the greater the risk – share prices can rise and fall quickly.

  • Volatility risk. Shares can be a volatile asset. The price can rise and fall quickly depending on a number of things such as good or bad company performance, company announcements and performance of the market.
  • Timing risk. The share market moves in cycles. Buying shares in a bull market is no guarantee of future performance.
  • Government risk. Laws can change and this can impact your share price and investment strategy.
  • Overseas risk. Investing in international shares exposes you to risk from currency fluctuations and foreign governments.

How does online share trading work?

Although there are physical stock exchanges, shares are purchased and sold online. There are a number of share trading applications from independent companies and financial institutions you can use to trade stocks.

You need a stock broker to act as an intermediary to the stock exchange. A broker can be a full-service broker or an online broker. As well as place trades on your behalf, a full-service broker can give you advice about which shares to trade. An online broker is an online software package which lets you execute trades yourself.

Online brokers are a low-cost option compared to full-service brokers. If you don’t want to go down the path of using a full-service broker, you can use share trading software to help you learn about which shares to trade, in addition to an online share trading platform to make trades.

Getting started

Here are some links to help you get started trading shares.

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Share trading jargon lookup

  • Blue chip. Companies that have a proven record of growth, for example Commonwealth Bank, BHP Billiton and Telstra, are blue-chip shares.
  • IPO. An initial public Offering is when a company floats on the stock exchange and sells shares to the public for the first time.
  • Income shares. Companies that pay a dividend to shareholders.
  • Growth shares. Companies that reinvest profits for long-term growth.
  • Capital growth. When an asset increases in value over time.
  • Rights issues. When a company makes shares available to existing shareholders at a discounted rate. Existing shareholders are not obligated to purchase shares under a rights issue and can sell the right to purchase discounted shares.
  • Settlement date. The date when the person who has made a trade purchasing shares must make a payment.
  • Sectors. A sector is a group of similar companies. For example, the resources sector is made up of mining and commodities shares.
  • Bull market. When the entire stock market is growing.
  • Bear market. When the value of the stock market is falling.
  • Day trading. A share-trading strategy where shares are purchased and sold in the same day for short-term capital gains.
  • Market capitalisation. The number of shares a company has issued multiplied by the price. This is a way of calculating the size of a publicly-listed company.

Jacob Joseph

Jacob is a writer and video journalist with finder.com.au. Credit cards, personal loans and savings accounts are his bread and butter, and he likes nothing more helping people understand the sometimes overly complex world of personal finance.

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