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6 reasons to consider investing in shares


Australia has one of the highest levels of equities ownership in the world. Today 38%1 of Australian adults own equities, either directly or through managed funds. If you are considering investing, here we outline some of the key benefits of the asset class.

Equities, also commonly known as shares, are classed as a growth asset as they are essentially linked to the revenues of the company’s business. They appeal to a range of investors because they offer attractive income opportunities and exposure to a broad range of industries and sectors that provide growth and diversity within an investment portfolio.

Research by the Australian Securities Exchange shows that share ownership is increasing across the board among all age groups, incomes and education levels. Below we look at the key reasons equities form the basis for so many portfolios.

Key benefits of investing in equities

1. Capital gains over the long-term


Historically, equities have provided some of the strongest after-tax investment returns over the long-term. By owning equity in companies with growth potential, investors have the opportunity to benefit from capital gains as the asset grows in value over time. Investors enjoy unlimited participation in the earnings of the firm. Of course, investors cannot expect the company to pay out all its profits in a form of a dividend as this may come at the risk of future profitability and a lower share price.


2. A good source of income


The dividend yield on equities is another important source of return. Unlike term deposits, dividends from equities can have inflation built into earnings where companies are able to pass cost increases onto customers.


3. Highly liquid


Equities are traded on major stock markets around the world. They are highly liquid which means that they can be converted into cash quickly and with minimal impact to the price received. Unlike direct investments, there is relative ease in the transfer of ownership and the movement of equities.


4. Tax advantages


The after-tax performance of equities is lifted by dividend imputation, a tax benefit not shared by other asset classes. The dividend imputation system allows investors who have been paid a dividend to take a personal tax credit (franking credit) since the company has already paid tax on the dividend.


5. Corporate control


Equities come with certain rights including the voting rights to which the investors are entitled. The level of corporate control depends on whether the equity is classed as ‘ordinary’ or ‘preferred’ and on the size of your shareholding.

Ordinary shares represent the majority of shares held by investors. When you own an ordinary share of a company, you usually have one vote per share that entitles you to participate in the election of the board of directors.

Despite their name, preference shares have fewer rights than ordinary shares, except in one important area – dividends. Companies that issue preference shares usually aim to pay consistent dividends and preference shareholders have first call on dividends. In the event that a company is liquidated, preference shareholders have prior claim to assets over ordinary shareholders. This feature allows the company to raise capital from venture capitalists before it goes public because most venture capital deals are structured as preference shares.


Comparison of ordinary and preference shares

Ordinary shares Preference shares
Have a right to vote Do not have any voting rights
Have the right to maintain a certain percentage in the company No rights over the stake in the company
Do not know the dividend amount you will receive in advance Dividends are fixed (although in some periods there may be reduced or no dividends)
Dividends can increase as the company grows Fixed dividend amount is usually higher than the dividends on common equities

6. Limited liability


One of the unique features of owning equities is the notion of limited liability. This means that when you own equity in a company and in the event that company loses a lawsuit and must pay a large settlement, creditors can’t come after your personal assets. Your liability is limited to the amount invested in the company.


Conclusion

While equity markets have historically produced higher returns than cash or fixed income over the longer term, the risk of capital loss exists especially over the shorter term. You should be aware of the risks of investing and speak to a qualified financial adviser to determine if an investment in equities is suitable for you.

As markets are not always efficient, using an active manager may also help to manage risks and improve performance. A good manager can identify undervalued securities to invest in by carrying out their own research on sectors and companies, including face-to-face meetings with management to determine the intrinsic value of a company’s share price.


1. Australian Share Exchange, Australian Share Ownership Study, November 2012



To learn more about investing in equities, download our detailed Understanding Equities booklet.


Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.


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