A CONCISE GUIDE TO

INVESTING IN SHARES
Risks, Rewards and Questions
Every Investor Should Know
7 S for new investors
TI
P

by Daniel Thalji - B.Bus B.Com DFP

& Edward Huynh - B.Ba (Fin), B.A, DFP
 AN INTRODUCTION to shares

This guide
S hare investment has captured the hearts
and minds of Australians for decades.
Everyone seems to know of at least one ‘share
aims to:
story’ - accounts of overnight success contrast
against sordid tales of share market crashes and
everything in between. For those investing for the • Provide an overview of how
shares work
first time, entering the equity market can be both
daunting and exhilarating. • Identify the various methods of
equity investing
Is share investment right for you?
• Highlight essential questions
Buying shares should not be about trying to and challenges
outsmart the market or find a shortcut to wealth.
• Identify common risks, traps
Successful investors have a plan; they know what
and mistakes
questions to ask and are aware of the common
• Outline how to develop an
traps. The decision to invest should stem from
investment strategy
calculated and strategic experience, where goals
• Provide general tips to help you
and strategies are placed at the forefront, time
get it right
is used as leverage and discipline restrains the
temptation to act upon emotion.

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 the basics:
how shares work

S hares, also known as equities,

represent a partial investment in a
company. Through owning a share in a
company, an investor becomes entitled to
a portion of its profits and an equivalent
obligation for its losses. In practical terms,
as a company expands, so does the value
of its shares and vice versa. In return for investing in the company,
shareholders can receive dividends and
The Australian Securities Exchange
other benefits, however they can also share
(ASX) describes the share/equity
in the losses.
market as follows:
Shares that have been issued to investors
A company can raise money to finance
by a listed company can also be sold to
its business by ‘going public’. Going
other investors. In this way, long-term
public means the company places itself
shareholders aim to capture an upward
on the share market and offers shares
trend in market value.
to investors. By paying for the shares,
each investor buys part ownership of the
company and becomes a ‘shareholder’ of
that company.

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 key terms and
definitions
Income (dividends): The profits of a
company can either be reinvested in
the business or distributed amongst its
shareholders as ongoing income. This
income is known as a dividend and is
generally paid out on a semi-annual
basis. A general rule is, the larger and
more established the company, the larger
the dividend yield.
Growth (capital gains): Purchasing a
share at one price and selling it later at a
higher price is commonly known as capital
growth. The value of a share is influenced
primarily from the growth of the company
you are invested in. There is risk involved
if you own a share in a company that
becomes unsuccessful, causing the share
to lose value.
Tax benefits (franking credits): Realising
a capital gain will incur a tax implication, but
unlike earning interest from cash in the bank
a dividend payment can yield effective tax
benefits known as ‘franking credits’.
Franking credits: Companies pay tax
on their profits. When after-tax profits are
distributed as dividends they are described
as ‘franked’. Franked dividends come with
a franking credit, which represents the
amount of tax the company has already
paid. Franking credits are then passed on to
shareholders along with dividends.
When you work out your tax, the franking
credits will get you a credit for any tax the
company has already paid if your top tax
rate is less than the company’s tax rate. For
example: if you pay a tax rate of 25% and
the company paid 30%, the Australian Tax
Office will refund you the difference, which
in this case would be 5%. Most Australian
investors don’t have to worry too much
about the specifics of franking credits, but
they do need to ensure they provide this
information to their accountant at tax time.
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 understanding risks
and rewards
T here are many benefits to investing in shares, but an awareness of the risks involved is
equally important when forming your expectations and will assist you when it’s time to
make decisions. An overview of the key benefits and risks are summarised in the below table:

Benefits
• Capital growth: This is a long term
objective and is incurred when an individual
experiences significant capital gains from
the shares they possess, i.e. the value of the
shares grows over time.
• Passive income: Some shares pay a
high dividend. These can assist with cash
flow management, as monies earned can be
attributed towards expenses and/or purchasing
more shares. In the long run, the passive
income stream may be sufficient to supplement
or even replace employment income.
• Liquidity: Most shares can be bought
and sold rather quickly if required. This allows
for ongoing purchases to occur speedily and
allows an individual to convert the shares into
cash if necessary.
• Low cost of entry: Purchasing shares
is relatively inexpensive and can be executed
through a phone call or online. An individual
will generally incur a one-off brokerage upon
purchasing a share and also upon sale,
avoiding any unnecessary maintenance or
ongoing holding costs.
• Diversification: Shares offer the ability
to spread risk over a wide range of companies
and industries. Shares possess many varying
characteristics that, when consolidated, can be
a well-balanced investment tool.
Risks
• Volatility: Share prices can vary
on a minute-by-minute basis. Growth
is not always in a straight line; you
could be in a negative position over a
period of time and a positive position
the next.
• Anxiousness: While these
day-to-day fluctuations are to be
expected from shares, you may feel
a degree of concern and anxiety
from short-term fluctuations in the
value of the share and the overriding
market conditions.
• External influences: Shares
can be influenced by factors beyond
an investor’s control, whether it be
negative news regarding a specific
company or a government policy that
has an unfavourable effect on an
industry.
Limited knowledge: Investing in
shares is risky if you lack knowledge
and understanding about the share
market. It is important to source
reputable information and get a good
education about the topic before
making an investment.
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 how do I buy shares?
There are several ways
you can buy shares.
These include:
Initial Public Offering (IPO)
When a company first goes public on the
share market, it is sometimes possible to
apply for shares directly from that firm.
This is known as an Initial Public Offering
(IPO). IPOs often create a lot of buzz
and attract considerable media attention.
It’s a good idea to ignore the hype and
focus instead on doing your research. It
is also recommended to seek a second
opinion by speaking with a financial
adviser. Like all investments, IPOs must
be considered carefully and assessed
in the light of your broader investment
strategy.
Employee Share Scheme
This type of scheme allows employees to
receive shares in the business they work for.
On the surface employee share schemes
may seem simple and attractive, but such
offerings should still be given the same
consideration and analysis as publically
offered shares. It’s also important to note
that taxation laws surrounding employee
share schemes changed as of 1 July 2015.
It’s therefore highly recommended that you
consult a financial adviser or chartered
accountant to understand the impacts
before finalizing your decision.
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Stockbroker
A stockbroker has specialist knowledge in the
share market and can assist you with buying
and selling shares. A stockbroker’s role is
to provide general or retail advice relating to
shares and how they might fit within your
portfolio. It is however important to note
that a stockbroker will not work with you to
provide an holistic or overarching financial
plan or investment strategy that goes beyond
buying and selling shares. Stockbrokers will
also charge a fee for each transaction.
Financial Adviser
A financial adviser works with you to
build a holistic financial strategy in
which investments in shares may be one
component. It is their job to help you find
investments that will help you to achieve
your goals.
When working to identify an appropriate
equity investment strategy, a financial
adviser will also take your age, tolerance
for risk, budget, cash flows and life stage
into account as much as the actual equity
investment itself.
Online Broking Services
An online brokering service does not offer
advice and can facilitate trades for a small
fee. You are in complete control and you
decide when you buy and sell. The risks for
new and unsophisticated investors include:
over-rating your expertise, convincing
yourself of good investments despite a
lack of evidence or due diligence and
reduced diversity of investments.
Managed Funds
Most of us already invest in shares by the
way of our superannuation or managed
funds. Managed funds benefit from
the skills and knowledge of investment
professionals who make decisions on
behalf of the fund. These types of indirect
investments make it easy to diversify
and provide access to otherwise difficult
asset classes such as infrastructure and
property. The down side is you’ll pay fees
and charges even if the fund declines in
value. Commonly the focus of these types
of funds is the way they are structured
and generally not the specific shares/
equities contained within the fund.
Instead, fund members are asked to select
between types of fund structures such as:
Conservative, Balanced and Growth.
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 important questions
every investor should consider

T he below framework can also be applied to equity investments. Answering these

questions can give you clarity and direction and enhance your position to make
informed investment choices. Some of the questions we recommend include:

• Why are you investing?

Why
• Is what you hope to achieve realistic?

• Are you ready to invest? Are you debts under control? If you are not
When
ready, when would you like to start?
• What is your timeframe for investing based on your goals?
• Why have you selected the above timeframes?
• How frequently do you intend to review your goals and investments?

• Where will you invest your money?

Where
• How will you access necessary information?
• Have you considered current market conditions and your
tolerance for risk?

• Are you investing directly or indirectly via vehicles such as

How
superannuation or both? Why?
• How will you top up, revise or exit your investment?
• How will you respond to market fluctuations?

• What is your investment strategy? What is the end game?

What
• Do you understand what you are investing in and is it appropriate
to your needs?
• What other options have you explored?
• Have you checked the terms and conditions of the investment
and any fees or commissions you’ll pay?

• Are there other parties involved, such as a spouse or partner?

Who
• Will you invest on your own or use an adviser?
• Who are the companies behind the investments?

• How much do you have to invest?

How much
• How much do you understand the investment you are
about to undertake?
• How much money do you have in cash for short-term
emergencies? Is this enough to cover yourself and any
commitments your investments may require during this period?

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TI
7
PS
for new investors

T he key to any good strategy

is planning and information.
This is also true when developing
an investment strategy. There is
of course a lot to consider if you
are thinking about investing in the
equity market, and for many it can
be overwhelming.

The tips below consolidate

the most important pieces
of the puzzle and hopefully
lay a foundation for those
considering the next step.

Shares are a tool Without a financial goal in mind how do

1 NOT a strategy!
Shares can be a great way to build
wealth and allow your finances to
get some exposure to Australian
businesses. Their success translates to
your financial success. However, shares
should not be seen as a complete
strategy, but rather as a tool to help you
work towards your financial goals.
you know if you are on track to achieve
what you set out to achieve? How do you
know if your strategy needs to be changed?
It is important to ensure that you have clear
goals in place before investing into shares.
When putting together a strategy, you might
want consider the following questions:
• What would you do if your fund fell by
5%, 10% or even 30%? Would you sell
everything or possibly buy more?
• Do you want to stagger your share
purchases to average up or average down?

9
T here are a whole host of strategies and
there is no ‘perfect strategy.’ The best
strategy is one that works for you and one
• If you feel you lack the expertise to
choose which shares to invest into then
a managed fund may be appropriate. A
that you understand. Relying on ‘hot tips’ or managed fund is a professionally managed
another person’s investment strategy may not portfolio where an expert will manage
work as they will have different goals in mind your investments and make investing
and will have a different strategy as a result. decisions. When choosing a managed
fund, it is very important to make sure that
Once you have created a game plan
the investment strategy the fund manager
and have determined that shares are an
employs is one that aligns with your own
appropriate tool for you, you then need to
goals and overall strategy.
determine how you want to invest. There are
a few ways to invest into the share market What next?
and it’s up to you to decide which way is Once the strategy, goals and investment
most appropriate for your financial goals. method have been determined and executed
then you may feel like it’s time to relax as all
The main methods are direct investment,
the hard yards have been done, but this is
indirect investment and through managed
most certainly not the case. Shares are not a
funds.
set and forget strategy and it’s important to
• Direct investment is exactly what it review your portfolio at appropriate intervals.
sounds like - purchasing a share of a Some things may need to be changed, some
certain company and enjoying growth things won’t - nevertheless reviewing how
when it enjoys growth, but also suffering your fund has performed is a crucial step to
losses when it doesn’t perform as well as succeeding in the share market.
expected.
If any changes are going to be made to the
• Indirect shares are often referred to fund, ensure that they are made with your
as index funds. Instead of purchasing goals in mind and no decisions are made
shares in a single company, index funds on emotion as that is often a sure-fire way
incorporate a bit of everything and can of losing on the market.
often track the market as a whole. For
example, the ASX200 tracks the top 200
companies in Australia and an index fund
may have a stake in all 200. This way
anything that happens to one individual
company is not likely to impact other
organisations too adversely, so your
investment may go down a small amount
but nowhere near as much if you only had
a stake in that one company alone.
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 Before investing, you might want to consider
2 Determine your the following:
risk profile • If anything were to happen to your portfolio
A risk profile is used to gauge your would you be prepared to ‘ride the wave?’ or
understanding of the financial markets and would you cash in and crystallise the loss?
your tolerance of risk. The main components • How much would you be prepared to see
measured are your knowledge of finance, your portfolio drop by before you made any
your investment horizon and fear of loss. changes?
With these three things determined it makes
• Conversely, how much would you see it
it much easier to choose which shares are
grow by before you cash in or make any
more appropriate for your situation.
changes?
Naturally all shares have risks involved but
These questions are incredibly important
some are far riskier than others. Shares
and are part of the strategy discussed
are renowned for their volatility and sharp
above. Having clear guidelines around what
movements. They are commented about
could potentially happen, and how you will
constantly in the media and therefore have
respond to any changes, will ensure you
far more visibility and exposure than your
have a framework and structure in place to
average investment vehicle. If a property was
address unexpected situations as they arise.
valued every second, every hour of every
day then the perceived stability of property
prices wouldn’t seem so stable.

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 3 Set the right
expectations for
yourself
As discussed earlier, shares should be seen
as a tool, not as an investment strategy. It’s
important to fully comprehend what it is you
are trying to achieve and ensure that shares
are appropriate for your situation.

Shares should be considered as a medium-

How many stories have you heard of people
to long-term investment (usually 5 years
selling their portfolios because they were
if not more), as the ups and downs in the
afraid of losses (the GFC being a prime
market can have a great impact on your fund.
example)?
When investing into shares, ensure that you
In all three of these scenarios, investment
are using money that you can afford to lose
decisions were made through emotion
and not money that’s required for everyday
rather than a clear cut strategy with a
life. Returns are not guaranteed and you
financial goal in mind. There will always be
must prepare yourself for the worst case
other companies that are doing fantastic,
scenario rather than contemplating what to
always more opportunities and there will
do when you’re rich.
almost always be losses. What’s most
important is to ensure that all investment

4 If you’re getting decisions are made through a calculated

Excited you’re strategy.
probably doing
it wrong
5 When it sounds
Investing can often be very exhilarating and too good to be true,
exciting, which it is! But you cannot allow it probably is
these emotions to rule and dictate your
You may have heard of a few get rich quick
investment decisions. The fear of missing
schemes or stories about how some guy
out and the fear of loss are often what drive
used a secret that Wall Street doesn’t want
the underprepared to invest haphazardly.
you to know about and got rich through the
How often have you heard someone
share market. These ‘strategies’ often require
mention that they wish they invested into
some form of upfront payment to get the
XYZ company earlier but never did? Of
‘secret’.
those who actually invested, were they afraid
they would miss out on a ‘sure thing?’

12
 The truth is, there’s no secret formula Investing should only be done for the
to share market success. There is an purposes of future financial gain and to
old adage that the easiest way to achieve your goals. Buying or trading shares
make a million dollars is to start with
as a hobby is a great way to lose money as
two million.
you might lack the education and discipline
So if you do hear about some get rich quick to generate good growth.
scheme or something about ‘guaranteed
returns’ then it’s often prudent to stay far
7 Investing is a
away.
team sport
If investing isn’t your full time occupation
6 Don’t treat your
shares like toys and you don’t have expert knowledge on the
financial markets, then it’s probably best to
While they can be very enjoyable and work closely with a trusted adviser who will
exciting, shares shouldn’t be seen as a provide you with guidance and assistance in
plaything or hobby. As discussed above, it is navigating the share market.
very important to manage your portfolio and
review your situation at appropriate intervals,
but over management through excessive  
buying and selling could potentially hurt
your portfolio in the long run.

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 choosing an adviser

The Australian Securities

Investment Commission (ASIC)
MoneySmart website provides
excellent advice for those
selecting a Financial Adviser. Licensing means you have more protection
if something goes wrong, including the right
to a free and impartial hearing of consumer
disputes. You can find more details about

A ccording to ASIC, it’s important to do

some research and talk with a few
advisers before you decide who to go with.
financial advisers on ASIC’s financial
advisers register at moneysmart.gov.au.

Some will do a better job than others. Benefits of personal

financial advice
Look for someone who:
When you work with a licensed financial
• Will put your needs first
adviser, you have the chance to discuss
• Works often with people in your situation in detail. Good advice from
your situation an experienced, well-informed financial
• Aligns with your personal adviser can help you save money and
goals and values become more financially secure. When
you deal with a licensed financial adviser,
Only talk to advisers who are employed by
you can also complain if something goes
or are authorised to represent a licensed
wrong. Advisers who are members of a
advisory business. ASIC licenses and
professional association are subject to
regulates the financial advisory industry so
member standards, operating guidelines
that it operates efficiently, honestly and fairly.
and disciplinary procedures. 

14
 self-assessment
checklist
Are you on the right track?

N ow that you have a better understanding of the risks, rewards and challenges of invest-
ing in shares, you might want to evaluate whether you are on the right track. Take this
short self-assessment to identify areas where you are doing well, as well as areas where you
might need some further assistance.

On the right track

You have clearly identified your goals.
You have thought about how you would respond to market volatility.
You invest based upon prudent advice, taking into consideration your age, goals, life
phase and tolerance to risk.
You have sought assistance from a licensed adviser to develop a personalised
investment plan and have taken the time to understand the options, benefits and risks.
You have an exit strategy.
You review your investments to ensure they remain on par with your goals.
You’ve got a cash buffer to protect you and your investments from short term
emergencies.
You’ve got your debt under control and have done a budget. You know exactly what
expenses you have and what ongoing commitments your investments will require.
You work with a licensed financial adviser. You ask lots of questions and ensure you
understand the process the best you can.
You have diversified your investments (not all eggs are in the same basket) to
control exposure to risk.
You invest upon strategy and forecasts.
You understand that no matter how good the advice or offer looks, there is no such
thing as a getting rich quick scheme.
You’ve looked at your insurances as part of your investment strategy.
You have a will and have considered estate planning.

15
self-assessment
checklist
Danger Signs
You take water-cooler investment advice from relatives and friends at work without
double checking facts or consulting a financial adviser.
You aren’t aware of all the terms and risks of an investment but on the surface it
sounds good.
You invest based on hype, online information or the press media.
You do not have an investment plan or goals but somehow know you should invest
in something.
You do not have a clearly defined exit strategy.
You borrow money you can’t afford to lose.
You are having difficulty paying off current debts.
You haven’t done a budget or analysed your cash flows and you don’t know what to
expect.
You ‘set and forget’ your investments or leave them for someone else to take care of.
You have an ‘all-in-one’ type of investment and have not diversified your investment
portfolio.
You invest based on feeling, often fear or excitement.
You believe there will be a quick win in the short term.
You haven’t reviewed your insurance to ensure you have enough protection.
You believe (or are unaware) that wills and estate planning has anything to do with
developing a sound investment strategy.

16
 how we can help

F uture Assist provides holistic financial planning, budgeting, investment, accounting, debt
consolidation and other financial services to customers throughout Australia. We are a
privately owned specialist financial planning firm, employing approximately 100 staff and
encompassing 7 specialist teams. We are committed to providing ‘whole of life’ wealth
management expertise to motivated Australians.

How are we different from
your average financial
planner?
Future Assist is independently owned and as
such has no institutional shareholders and no
investors such as banks or investment groups.
This means we are able to offer a wider
solution which focuses purely on your strategy
rather than a handful of products. We have
offices located in all eastern seaboard states
in Australia and provide flexible consolations
either at one of our offices, at your home
or via tele-consult. Our main objective is
to educate, explore and provide strategic
advice, not sell financial plans as a means of
distributing products. We are motivated to help
you find the right strategy for you based on
your goals, your needs and your objectives.
Your goals are our focus.
All strategies developed for our clients is
reviewed by a panel of experts with over
60+ years of collective industry experience
between them, some of these panel members
are external to future assist and sit on our
panel to promote greater balance of advice.
We take into consideration all aspects of
your life and develop a plan that will help you
achieve your goals. We are help thousands
of Australians each year keep on track to
reach their financial and retirement goals and
provide a better lifestyle for their family.

17
Need more information?
CALL 1300 118 618 NOW
TO Speak to a financial adviser
or visit futureassist.com.au

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