When you buy shares in a company listed on a stock exchange you receive a partial ownership in the company you bought into. This gives you the ability to participate in the upside (or downside) of any share price movement and allows you to receive a dividend (if any). Owning shares also allows you to participate in voting around important decisions for the company so you can have a small influence on the decisions the company’s management makes.
Shares in listed companies are for the most part purchased through a broker, who then places the order on the stock exchange on your behalf. With the advent of electronic trading this process is fully automated using online trading platforms provided by the broker. Rockfort Markets offers the Trader Workstation platform where you can buy and sell shares across most markets in the world at discounted brokerage rates.
When you own shares in a company it give you an entitlement to receive a dividend. A dividend is a distribution made by the company at set interval, for example quarterly, semi annually or yearly and typically follows soon after an earnings announcement. The dividend you receive is typically paid out of the profits of the company and you can generally choose to reinvest the dividend into more shares or receive a cash distribution. Whilst buying shares that pay the highest dividend may seem like a good idea, it is not always advisable. Often shares paying out very high dividends have a high payout ratio, which refers to the portion of net profit the company is paying out as a dividend so sometimes it is better to buy dividend stocks that have a lower dividend and lower payout ratio but more capacity to grow their dividend over time.
AU$18.95 or 0.1895%, whichever is greater
US$9.95 or US$0.02 per share, whichever is greater
1. INVESTING IN SHARES
LONG TERM INVESTMENT
Long term investment in shares involves buying and holding stock for several years or more. This typically involves researching stocks and making a judgement call around either potential growth or value. There are many different investment approaches all coming with different risk profiles, but possibly the most common approach is to purchase a diversified portion of shares based on a combination of growth, value and dividend yield in order to gradually build up a passive income to live on at some stage in the future. The benefit of investing directly into shares yourself are the fee savings and the ability to outperform the average return through stock selection as compared with a fund manager along with having control of your own money and the decision making process. The downside obviously is that it is difficult to outperform an average benchmark for any length of time and requires a certain amount of time and effort to research the right stocks.
Long term investors tend to ride out the short term fluctuations in the market place, but do take significant risk in that shares can lose significant value in short periods of time and even the overall market can halve in value every decade or so. The upside is that long term investors are involved in the market when it is going up. In some respects it is dangerous to be out of the market because annual returns can be quite high and long term investors take full advantage as they are typically fully invested the entire time. A long term investment approach lends itself to a portfolio management style where the investor buys a diversified basket of stocks (5-20) and then every so often either re-balances the portfolio, meaning they switch one stock out for another that may offer a better return potential or re-weights the portfolio, meaning selling a portion of some shares, perhaps because they show good profits or might be overvalued and increasing the investment in other stocks in the portfolio that might offer better value.
2. TRADING SHARES
Share Trading is a more active approach to the market than long term investing. The general goal of most share traders is to generate an income from the market now, as opposed to some time in the future in order to supplement their current income or, if the trader is exceptionally good as a way to generate a primary income. Another difference is Share Traders look to generate income from buying and selling shares for a profit (at least in aggregate), as opposed to counting on dividend distributions as the source of income. There are many different approaches to trading and some of the mechanics are outlined below:
1. GO LONG AND SHORT
Share Traders may not limit themselves to trading only to the long side, meaning betting on the market going higher and quite often Share Traders may target the short side of the market and target stocks they expect to fall in value. Traders targeting the short side of the market simply sell first and buy back the stock at a later date. Rockfort markets allows Share Traders to go both long and short on a stock, but there are sometimes restrictions on short selling and also the stock has to be available for shorting purposes. In short if a Share Trader is bullish on the market they will take a long position, with the expectation the stock will go higher, and if the Share Trader is bearish on a stock they will take a short position, with the expectation the stock will go lower.
2. MARGIN LENDING
One of the advantages property investors often tout over share investing is that with property you can leverage you investment by borrowing money to buy a house. The return is then magnified as the investor receives the benefit of any capital appreciation not only on their own money, but on the borrowed money as well. If a tenant is paying rent on the property this might cover the full interest cost of the property an even produce a small profit for the landlord. What most people don’t realise is that you can do the same thing on companies listed on a stock exchange. Instead of buying a property you are buying into a company and potentially using dividends paid out by the company to cover the interest on the borrowed part of the investment. Margin Lending works like this: Let’s say you have $10,000 to invest into one stock, perhaps as part of a wider portfolio or if not perhaps you’re buying into an exchange traded fund and the broker allows you to borrow up to 50% of the investment. This means that for your $10,000 investment you can purchase $20,000 worth of stock. If the stock goes up you receive the gain on the borrowed portion of your investment as well as on your own funds. There are several advantages to a strategy using margin lending on stocks compared with an investor who borrows to buy a rental property. Firstly if the company pays a dividend you don’t have to collect it yourself, unlike rental income on a property with either you or your property manager is reliant on the tenant paying on time. Secondly there is no cost to hold a stock whereas with property you have rates, maintenance and perhaps even body corporate or ground rent to pay. With a company the management is all taken care of for you and is reflected in the share price. Thirdly dividends can often be greater than rental income on a property, however this comparison largely depends on the stock or the property. Fourthly over time the Sharemarket, on a cash on cash basis has outperformed the property market in most developed countries. Also receiving finance to buy a stock is much easier than for a property and interest rates are much the same compared with a residential mortgage. If you have a margin account you can automatically leverage your investment on approved securities by 50% at the cash rate of the country where the stock is listed plus 1.5% and can buy the stock on your trading platform immediately. There are no bank fees or loan approval fees. In terms of holding costs it works out to be far more economical using margin lending to buy shares than borrowing to buy rental property. So you might be asking if it is this good why aren’t more people doing it? The most common answers to that question are that most people are unaware of what Margin Lending is and more importantly the stockmarket is more volatile than property with prices marked to market on an intraday basis. This means that if your investment falls below a certain threshold your broker will immediately liquidate your investment and you will receive the loss not only on your own funds but on the borrowed funds as well so margin lending is considered riskier. This is the main disadvantage to margin lending in comparison with property, where bank may only foreclose if you fail to make your mortgage repayments.
Given Share Traders are actively turning over their portfolio on a regular basis it is important to keep transaction costs down. Rockfort Markets only charges a small brokerage fee for each trade, as opposed to high brokerage fees and annual management fees, like most full service brokers and you can buy stock on international exchanges at significant discounts in comparison to other New Zealand providers, often up to 80% cheaper, particularly for US and Canadian stocks.
The tax position from trading varies to that of investing. In New Zealand, unlike investors, who are subject to Capital Gains Tax rules Share Traders must pay income tax on any gains they make from trading. The tax rules and amounts vary depending upon the market being traded, where you live, holding periods and the jurisdiction of the market being traded. For New Zealand traders, international stocks may be subject to the Foreign Investment Fund (FIF) regime, which can be tax advantageous on returns higher than 5%. It is advisable to seek professional help from a tax accountant who can outline the pros and cons of you trading or investment strategy from a tax standpoint.