Share Market Investment

Friday, September 19, 2014

10:34 PM

Factors encouraging investment in - Depth of the market (capitalization)

securities - Liquidity of the market (volume of trade)
- Efficient price discovery (new info reflected
in prices)

Diversification
Should include between 10 -25 stocks
Hold a variety of {Shares, fixed interest securities, property} across
different industry sectors
Two styles
Active: Structure portfolio to achieve superior returns by selecting
appropriate stocks
Passive: Buying stocks and holding them over a long period with
expectation that they will rise
Two approaches
Direct: Creating a portfolio through a stockbroker
Indirect: Forming a portfolio based on existing market index (ASX200)
Asset allocation considerations
Risk vs return
Investment time horizon (maturity)
Income vs capital growth
Domestic vs international

Taxation
Dividends usually paid twice yearly (interim and final)
Dividend imputation: Double taxation removed since 1987
Franked dividends: Dividends which the company has paid tax on

Tax on capital gains: Only 50% of cap gains are taxed since 21 sep 1999

Eg. $12700 dividend, 70% partially franked, was received by investor,

corp tax rate is 30%
Financial Performance Indicators

Capital Structure: Proportion of funding derived from debt and equity

M
easured by

Liquidity: Ability of a company to meet its short term financial obligation

M
easured by

Debt servicing: Ability to meet debt related obligations

M
easured
by
 Profitability:
M
easured by

Share price: Represents investors' view of present value of firms' cash

flows
M
easured by

Risk: Measure of variability of share price

Pricing of shares
Cum dividend
Buyer of share will receive next dividend payment
Share price includes value of dividend
Share price will fall by dividend value at ex-dividend date

Bonus share issue: Company distributing reserves as shares (no new

capital raised)
Eg. 1:4 bonus issue made, cum-bonus share price = $10
 Share splits: Division of a share into smaller equal shares
Eg. 1:5 share split, pre-split price = $50

Pro rata issue: Increase capital by issuing discounted shares to existing

shareholders
Eg. 1:5 issue at $0.88 with cum right price = $1.00

Renounceable right for 1:N

Share market indices

S&P indices
Performance benchmark index - over performance
Tradable benchmark index - narrower index for derivative products
Market indicator index - performance of group of stocks that reflect
market
Share price index - Measures cap gains/losses from investing
in index
Accumulation index - Measures share price + dividend
reinvestment

Dow Jones - Price weighted (weighting of company proportional to share price)

S&P500 - Market value weighted (weighting of company proportional to share

price)