23 May Property or Shares – Part II
Last month we looked at the key considerations when investing in property and this month we will continue to review the important aspects to consider when comparing investments in shares and residential property. Now, it’s time the shares (sometimes referred to as equities) got their time in the sun.
What are Shares?
Shares are an investment made into a company with the objective of providing a share in a company’s profit. As such, the asset is generally intangible and its value purely based on an assessment of future profits. Property however, is bricks and mortar (very tangible) and the owner is paid a fee (rent) by a tenant, for the use of the property. As we’ve seen in Australia recently, the price is not purely related to the future rental expectations of the property, but also from number of lifestyle factors.
- Value – there is a whole school of thought around how to work out the value of a share. Ultimately though, the highly visible agreement between the buyer’s bid and the seller’s offer determines the price of the share. This price moves almost constantly and can theoretically move to zero. Another potential risk for the shareholder is that the share will be delisted due to non-compliance with the exchange’s listing rules or due to bankruptcy. If this happens, the shareholding is effectively worthless.
- Divisible – whilst this is one of the major drawbacks with a property investment, it is one of the advantages of share investment. Now that we have access discount brokers who charge as little as $10 per trade, a relatively small parcel of shares can be traded very cheaply and used provide funds as required.
- Research – there is no shortage of research available on the larger listed companies. Unfortunately it is often difficult to sort the wheat from the chaff and even the general adage of ‘you get what you pay for’ does not always play out (there are some paid sites that are no better at providing guidance than free sites). It is essential that you do your own research and use a number of different tools and insights before making an investment decision. If you don’t have the time to do your research it is important to use a broker or adviser as the market is a dangerous place to invest based on the latest ‘hot tips’.
- Liquid – the Australian market trades weekdays between 10am and 4pm and the top 100 listed shares normally have a deep market of buyers and sellers. The variation in price between the highest bid and the lowest offer, known as the bid-offer spread is also generally one or two cents. This means that share owners can exchange a holding to cash in a short time and the settlement of the shares is finalised in T+2 days, giving you the cash payment in your account very quickly!
- Purchase and Selling Expenses –the cost of buying and selling a parcel of shares is known as brokerage and can be as low as a 0.07% of the transaction value or $10 for smaller share parcels. There is generally no stamp duty or legal costs. The other main cost in selling your shares is the potential capital gains tax arising from the profit of any traded shares.
- Ongoing costs – there is no further commitment of funds required by the holder of ordinary shares. The company (or security) manages its own revenues and allocates these to expenses. The shareholder of an ordinary share is only limited to losses on the costs of the shares purchased and no further costs need to be met. There are some other listed securities (such as instalment warrants) where the buyer still needs to provide further capital to the company. Sometimes, companies raise further funds though rights or share purchase plans but in these situations.
- Gearing – lenders are not willing to offer as much leverage to shareholders (where the only collateral offered are shares) and the maximum loan is 70% of the share purchase price. The other issue with gearing into shares is that any reduction in share price that results in the value of the share holding falling below the agreed leverage limits will result. Generally then most borrowers borrow more conservatively, gearing about 50% or less of the share portfolio value. Thus an investor cannot (or generally will not) leverage into a share portfolio at the same level that a property investor does.
In summary, there are a number of important considerations here and the share investor needs to spend time assessing the risk and reward outcome of a potential investment. The implications of each of the above points should be fully assessed prior to committing to a purchase.
It is important to note that markets can move quickly in any direction and investing in the Australian market outside of the top 20 (large companies) can often result in large price movements in the shares. This is because a major company announcement may result in insufficient liquidity in the market being available to support a large buy or sell order.
We’re passionate about education at Orion Financial Group and when it comes to trading in growth assets like shares, the better you understand the investment the more likely you are to make a wise choice. If you are looking to invest and want some guidance on what best meets your needs and requirements we are here to help, call us on 02 9633 5530 or submit a request for advice via our website form.