Shares are also known as equity, or stocks. We will use all three terms interchangeably.
What are Shares?
When you buy shares in a company, you are buying part of the company, meaning that you become a part owner of the company. As a part owner you have the right to:
Share in the profits of the company: Any profits that are distributed to shareholders will be paid to you as a dividend. Dividends are usually paid semi-annually.
Vote: When key decisions are made in the company, as a shareholder, you will have the right to vote. For example, you may get to vote at the Annual General Meeting (AGM) about which directors to elect, or how much company executives should be paid.
Shares are very different from bonds. When you invest in bonds, you are lending money to a company. When you purchase shares, you are becoming a part owner of a company.
Why Invest in Shares?
Shares are a key part of any investment portfolio. The top reasons why you would invest in shares are:
Capital Growth: Australian shares generated a higher investment return than either cash or bonds, with an average per annum return over the last 20 years of 8.70%. Investing in shares helps grow your investment (also known as capital) over time and achieve a portfolio growth rate that is ahead of inflation.
Dividends and Franking Credits: Some people invest in shares for the income provided by dividends. A further benefit, when you invest in Australian shares, is the franking credits that some shares provide.
A Franking Credit is a credit you receive for the tax that a company has already paid. A company will usually pay tax on its profits at a rate of 30%, if the dividend you receive is franked, you will receive a tax credit for the amount of tax that the company has already paid on that dividend. This will be particularly beneficial if your marginal tax rate is below 30%. For example, if you hold the shares in your superannuation account:
Prior to retirement (i.e. during the accumulation phase of your super): Any income you receive is taxed at 15%. This means that if you invest in shares that pay a fully-franked dividend, you’ll receive a tax credit of 30% and only pay tax of 15%, leaving you 15% better off.
In Retirement (during the pension phase): You don’t pay any tax on the income generated from your superannuation account. If you invest in shares that pay a fully-franked dividend, you’ll get the full benefit of the 30% tax credit.
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