Understanding Shares: A Guide for New Investors

02 September 2025

Investing in shares can be a powerful way to build wealth over time, but it's crucial to understand the fundamentals before diving in. This guide provides a comprehensive overview of shares, covering essential concepts and strategies to help you make informed investment decisions.

1. What Are Shares and Why Do Companies Issue Them?

Shares, also known as stocks, represent ownership in a company. When you purchase shares, you are buying a small piece of that company's assets and future earnings. Companies issue shares primarily to raise capital – money they can use to fund growth, expand operations, invest in research and development, or pay off debts. This process, known as equity financing, allows companies to access funds without incurring debt that needs to be repaid with interest.

The total value of a company’s issued shares is known as its market capitalization. If a company has 1,000,000 shares outstanding and you own 1,000 shares, you own 0.1% of the company’s equity. This entitles you to a portion of the company’s profits and, potentially, a voice in its management through voting rights.

2. How to Buy and Sell Shares

You cannot directly purchase shares from a company. All transactions occur through a stockbroker, acting as an intermediary between you and the stock exchange. In Australia, the primary stock exchange is the Australian Securities Exchange (ASX).

Choosing a Broker:

There are two main types of brokers:

• Full-Service Brokers: Offer comprehensive services including investment advice, research reports, and portfolio management. They typically charge higher brokerage fees for these added services.
• Discount/Online Brokers: Provide a platform for buying and selling shares at lower fees. They generally do not offer investment advice, requiring investors to make their own decisions.

Brokerage fees can range from under $20 per transaction for online brokers to over $100 for full-service brokers. It's essential to compare fees and services before choosing a broker that aligns with your investment needs and expertise.

Initial Public Offerings (IPOs):

Occasionally, companies choose to list on the stock exchange for the first time through an IPO. Applying for shares in an IPO involves reviewing a prospectus – a detailed document outlining the company’s financial performance, risks, and terms of the offering. Carefully read and understand the prospectus before applying.

3. Understanding Share Price Volatility

Share prices are not static; they fluctuate constantly based on market forces of supply and demand. Numerous factors can influence share prices, including company performance, economic conditions, industry trends, and even global events. The stock market is inherently volatile, meaning prices can experience significant swings in short periods.

Important Considerations:

• Past performance is not indicative of future results. Just because a share has performed well in the past doesn't guarantee it will continue to do so.
• Company Bankruptcy: There is always a risk that a company may face financial difficulties and potentially go bankrupt. In such a scenario, the value of your shares could fall to zero.
• Diversification: To mitigate risk, it is crucial to diversify your portfolio by investing in a range of different companies and industries.

4. Factors Influencing Share Prices

Several interconnected elements influence the price of a share. These can be broadly categorized as:

• Internal Factors: These relate to the company itself. Strong financial results, effective management, innovative products, and positive brand reputation can all drive share prices upwards. Conversely, poor performance, scandals, or a lack of innovation can lead to price declines.
• External Factors: Macroeconomic conditions, such as economic growth, interest rates, inflation, and unemployment, significantly influence market sentiment and share prices. Political events, natural disasters, and global conflicts can also create volatility.
• Market Perception: Investor expectations and sentiment play a crucial role. Even if a company is performing well, negative market perception can suppress its share price.

5. Dividends and Franking Credits: Sharing the Profits

Profitable companies often distribute a portion of their earnings to shareholders in the form of dividends. These are typically paid twice a year and can provide a steady income stream for investors.

Dividend Considerations:

• Dividend Yield: This represents the annual dividend payment as a percentage of the share price.
• Reinvestment: Dividends can be reinvested back into the company to purchase more shares, compounding your returns over time.
• Not Guaranteed: Companies are not obligated to pay dividends. They may choose to reinvest all profits back into the business for future growth.

Franking Credits (Australia):

Australia has a unique tax system for dividends called franking credits. These credits represent the tax a company has already paid on its profits. By passing these credits onto shareholders, the Australian tax system reduces the overall tax burden on dividend income. The benefit of franking credits depends on your individual tax rate.

6. Dollar-Cost Averaging: A Strategy for Volatile Markets

Dollar-cost averaging (DCA) is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of the share price. This can be particularly beneficial in volatile markets.

How DCA Works:

• High Price: When the share price is high, your fixed investment buys fewer shares.
• Low Price: When the share price is low, your fixed investment buys more shares.

Over time, DCA can help to lower your average cost per share, reducing the impact of market fluctuations. While it doesn't guarantee profits, it can help you build a portfolio over time without trying to time the market.

7. Shares vs. Other Investments: Key Differences

Shares are just one type of investment. Here’s how they compare to others:

• Liquidity: Shares are highly liquid, meaning they can be easily bought and sold. Real estate, for example, is much less liquid.
• Income Potential: Shares can provide income through dividends. Collectibles typically do not.
• Long-Term Growth: Historically, shares have provided strong long-term growth potential.
• Transparency: Share prices are readily available and transparent. Valuing assets like real estate or collectibles can be subjective.

8. Long-Term Investing: A Prudent Approach

Investing in shares should be viewed as a long-term strategy, not a short-term speculative venture. While some investors may achieve quick profits, these are often the exception rather than the rule.

Key Principles:

• Research: Thoroughly research any company before investing.
• Diversification: Spread your investments across different companies and industries.
• Patience: Allow your investments time to grow.
• Common Sense: Make informed decisions based on sound financial principles.

References:

• Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (12th ed.). McGraw-Hill Education.
• Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, 25(2), 383–417. DOI: 10.2307/2326988
• Roll, R. (1977). A Fresh Look at the Efficient Market Hypothesis. The Journal of Finance, 32(4), 989–1007. DOI: 10.2307/2326876

Disclaimer: This information is for general educational purposes only and does not constitute financial advice. Investing in shares involves risk, and you could lose money. Always consult with a qualified financial advisor before making any investment decisions.