What does buying shares mean for you as an investor?

CommSec CommSec

24 September 2018

This article was written with contribution from Ramzy Kaur, International Derivatives Market Dealer, CommSec Advisory

If you’re starting out in the share market, or you’ve recently bought your first shares, you might be wondering what you actually get when you buy shares.

When you buy shares in a company, you’re purchasing part of that company. This means you might be entitled to receive some of the company’s earnings, either in the form of dividend payments or capital growth (or both).

You could receive dividend payments

Some companies pay dividends to their shareholders, which you will receive as a dollar amount per share. For example, a company might pay a dividend of 80 cents – this means that for every share you own in the company, you’ll receive 80 cents.

Dividends are generally paid 4-6 weeks after what’s known as the “ex-dividend date”. If you invest in a company that’s paying a dividend, you’ll be entitled to receive the dividend as long as you buy your shares before the ex-dividend date and hold them until that date. (You don’t actually need to hold the shares up until the payment date.) If you buy shares on or after the ex-dividend date, you’ll miss out on the current dividend.

Some companies might offer shareholders the option to reinvest their dividends. This is known as a dividend reinvestment plan or DRP. If you opt in to a DRP, this means you will receive more shares in the company instead of a cash payment.

Some dividends might have tax benefits attached to them, such as franking credits. Because dividends are paid out of company profits (which have already been subject to company tax), you might receive a rebate for the tax paid by the company. Franking credits represent the amount of tax the company has already paid. For more information on potential tax benefits, we recommend you speak with your tax adviser.

Dividends aren’t guaranteed

Companies don’t have to pay dividends, and it’s up to them how the payments are distributed to shareholders. The amount of the dividend might also vary, so you can’t assume that a company will pay the same dividends year after year.

You could earn a return through capital growth

As a shareholder, you might also benefit from any increases in the company’s value - this is known as capital growth. If the company’s earnings grow, the value of its shares might also grow, and this adds to the overall value of your shareholdings with the company. If you buy shares for a low price and sell them for a higher price, you’ll make a profit when you sell.

As you can probably guess, if the company’s share price decreases, this will also decrease the value of your shareholding. If you buy for one price and sell at a lower price, you will lose money when you sell. That’s just the nature of risk versus return.

You might be able to influence the company you’ve invested in

One of the challenges of being a shareholder is the fact that the company you’re invested in is run by other people. Unless you’re a director or a board member, you won’t have the ability to control any of the business decisions that could have an impact on your investment.

But there are some other ways you can have influence as a shareholder:

  • You have the option to receive company information, and in some cases you should be able to attend the Annual General Meeting. These are usually held to update shareholders on any upcoming business decisions, and they can be a great way to keep tabs on the progress of the company and your investments.
  • Some companies may give shareholders the opportunity to vote for elected directors. This gives you the ability to select the people running the company where you have made your investments.
  • Some companies might offer shareholders the opportunity to participate in share issue offers, known as a “rights issue”. A rights issue is an offer to existing shareholders that lets you buy more shares in the company.
  • Companies may offer shareholders the opportunity to influence corporate actions (for example, a merger with another company or a demerger of an existing business into two or more separate businesses). These corporate actions can impact a company’s market capital and the value of its shareholdings.

So while you can’t steer the ship, there are still ways to potentially have an impact on the direction of your investment in a company. Find out more about your rights and benefits as a shareholder.

If you’re ever unsure how to manage your share investments, speak to a professional investment or tax adviser.

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Information presented in this article is not advice and has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Any prices or securities used in the examples in this presentation are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to the individual's objectives, financial or taxation situation and needs, and, if necessary, seek appropriate professional advice. The article is written by external companies that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. The CBA Group does not accept any liability for losses or damage arising from any reliance on external companies and their products, services and material.

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