Buying a share in a company or business represents a part ownership in that company or business.
As a part owner (shareholder) in the company, you are entitled to a share in the net profit of the company. These payments are referred to as dividends and are classified as income for tax purposes.
The movements in the share price of the company above or below the price you paid will determine whether or not you make a capital gain or loss on the purchase. Learn more about capital gains tax here.
Most common share purchases are made in listed companies, which means they are bought and sold on a stock exchange, such as the ASX. This offers ease of transaction and an increased market to buy or sell to when compared to transacting in shares of a privately held company.
When buying shares, there are some key considerations to be aware of:
- Diversification – How reliant are you on one company or even sector. For example, it is common for direct share investors in Australia to have exposure to a combination of the Big Four Banks in their portfolio. While multiple companies reduce the stock specific risk, there remains a risk that economic, legislation or regulation changes will impact each company in a similar manner.
- Liquidity – Some of the smaller companies on the stock exchange do not have the same volume in trading as the top 100 or 200 companies. This can make buying and selling these holdings a little more complicated and time consuming if there isn’t a large trading volume each day.
- Costs: Each purchase and sell will have costs associated such as brokerage charged by the trading platform or stock broker as well as tax consequences, of selling a share in a gain and or loss position. (tax treatment will vary depending on individual circumstances, entity used).