The sharemarket does have its own language, understanding some of the terms will help you navigate your way around making a decision on what shares to buy. As far as share returns are concerned the dividend, dividend yield and the level of any franking credits attached to the dividends are the most important factors in a share holders return.
Now lets look at what some of the terms mean:-
DIVIDEND: What the company pays out of its profits to shareholders. A dividend will usually be expressed in terms of cents per share.
DIVIDEND YIELD: Helps us measure what sort of return we are getting on our shares. Simply the dividend as a percentage of the share price.
FRANKED DIVIDEND: Dividends that come to share holders’ hands with a credit for company tax already paid. This is the Dividend Imputation System. The credit reduces the income tax the shareholder is liable for on dividend income and makes shares a more attractive investment.
ALL ORDINARIES INDEX: The main indicator of the performance of the Australian Stock Market. This index measures movements in the major 300 stocks and makes it easier to compare the investment performance of the market over time.
BROKERAGE: The fees we pay to share brokers to buy and sell shares for us. Shares must be traded through a licensed broker. There are discount brokers but the general fee scales are: 2.5 per cent on first $5000; 2 per cent between $5000 and $15,000; 1.5 per cent $15,000 to $50,000 and 1percent above $50,000.
SCRIP: Share certificates showing the number of shares held, it is your proof of ownership of shares.
BONUS SHARES: A free issue of new shares to existing shareholders in proportion to their holding, eg a ‘one for five’ issue.
OPTIONS: The right to buy shares on particular terms within a specified time. Options themselves are traded like shares.
RIGHTS ISSUE: An invitation by the company to existing shareholders to buy new shares at a discount to the market price.
EX-DIVIDEND: Purchasing shares ‘ex-dividend’ means the holder does not receive the current dividend being paid by the company.
CUM-DIVIDEND: Purchasing shares ‘cum-dividend’ means the holder has bought in time to qualify for the current year’s dividend.
EARNINGS PER SHARE (EPS): Another ally for investors measuring a company’s profitability. Shows how much net profit is earned for each share.
PRICE EARNINGS RATIO (P.E.): A very helpful statistic for the share investor, measuring how accurate the share price reflects the value of the company. It is the ratio of the share price over the EPS. A low ratio means a company’s shares are more bargained-priced. P.E. ratios should generally be between eight and 15, i.e. a share price eight to 15 times the earnings per share.
If you want to use shares to create wealth then focus on cashflow figures when judging companies. This indicates the ability of a company to pay back its borrowings. Knowing which shares to buy and keeping an eye on your stocks to make sure they are all right can get very technical but work on understanding as much as you can if this is where you want to invest.
Have an outstanding day,
Power Thought
‘My income is constantly increasing’
Say this to yourself several times today
Teresa and the Team at
Reference
What I Didn’t Learn in School but Wish I Had, Homestudy Program by Jamie McIntyre with Leigh Barker, CPA PNA ACIS SIA (Aff)
Photo supplied by Danilo Rizzuti @ http://www.freedigitalphotos.net/images/view_photog.php?photogid=851
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