Monday, August 2, 2010

Buying and selling shares

Buying and selling shares
The share market can be thought of in terms of its two main functions: The primary market where companies raise money by floating their company and selling shares to investors. Following this Initial Public Offering, the shares are then able to be traded on the share market (the secondary market).

So as an investor there are two distinct points at which you can purchase shares:
1. From the company itself in the very first instance of the shares being offered in the float.
2. Following the float, shares are bought from other investors via the share market. Shares can only be sold on the secondary market.
Buying shares in a float or Initial Public Offering

The word float is used when a company seeks to raise money by offering its shares to the public for the first time. The company must first submit details of its business and the proposed share issue to the Australian Securities and Investment Commission (ASIC) in a document called a prospectus.
Once the prospectus is lodged with ASIC, it is then available to potential investors for consideration. If you wish to buy shares in a float, you must first review the prospectus, fill in the attached application form, specifying the number of shares you want to buy, and send it with your payment to the company or lodge it with your adviser.
Lodging and/or registering a prospectus with ASIC and listing on the ASX does not guarantee the company will be successful once share trading begins.
Among other things, a prospectus is required to contain all the information that investors and their professional advisers would reasonably require to make an informed assessment.
When assessing a prospectus it may be useful to answer the following questions:
• Who – who is involved? (stockbrokers, underwriters, management, board, others)
• What - what is on offer? (growth, income-yielding, tax-effective or speculative shares)
• When - when does the issue take place? (bull/bear market)
• Why - why are they raising funds? (expansion, retire debt, sell down, takeover)
• How - how to participate in the issue? (public pool, firm share, entitlement, demutualisation)
If there is a great deal of investor interest in a new float, you may be allocated fewer shares than the number you applied for or none at all. With some floats, the initial share price (issue price) is not set until just prior to the first day of trading. You should obtain independent advice from a licensed professional adviser prior to making any final decision.
Following the float the shares are now listed on the share market. From this point shares can only be bought and sold on market through a stockbroker.

Buying and selling shares through a stockbroker
Establishing a relationship with a broker is easy. Each broker will have a slightly different process, but most require you to establish a client account. They may also need bank account details for the lodgement or receipt of trading proceeds.
When you place an order to buy or sell shares, you have a choice of two ways to tell your broker what price you will accept. You can place your order 'at market', meaning you will accept a price at or about the market price of the shares at the time you are placing your order.
Alternatively, you can place your order 'at limit', and inform your broker of the highest price you are prepared to pay or the lowest price at which you will sell. Orders where you set a 'trigger' point are known as conditional orders.
Determining entry and exit prices for shares is important. Investors are very capable of buying shares, however many fail to consider when to sell. Setting a target price to sell is an often overlooked skill.
When placing an order with your adviser, make sure you are fully informed and that your order is confirmed. Ask the current market price and write it down. Then tell your broker the details of your order (i.e. the amount of shares to be bought or sold and the price at limit or at market). They should then repeat the order back to you.
Internet based stockbroking websites provide confirmation screens for you to double check your order before it is processed.
Following a transaction on the share market you will be sent a contract note (confirmation). This outlines the details of your trade, including the number of shares and the amount paid or received for them.
Happy trading!