Tuesday, April 19, 2016

Top 4 benefits of investing in shares

Investing in shares can be quite a rewarding  experience. There are plenty of risks, however the benefits outweigh the risks if you do your homework.

Following are my top 4 benefits of investing in shares

Capital growth - Capital growth occurs when the value of your investment increases. Many people invest for capital growth to build their wealth and protect themselves against inflation.

People invest in shares because they offer the possibility that their price will rise. Owning shares in a company with a rising share price is one way to achieve capital growth.

Capital growth is essential to investors as long as there is inflation. Inflation is a measure of the rise in the price of goods. The Reserve Bank of Australia (RBA) aims to keep inflation within a range of 2-3%. With no capital growth, your money will buy less in the future than it does now.

Income - A dividend is the distribution of a company's net profit to shareholders. Dividend yields vary greatly from company to company. It is not compulsory for a company to pay a dividend.

For Australian investors, dividends are often worth more than the cash payment they receive. This is because a company can also distribute franking credits for any company tax it has paid.

Franked dividends carry imputation credits, which entitle shareholders to a tax offset or a reduction in the amount of tax to be paid. If your marginal rate of tax is lower than the company tax rate, the excess franking rebate can be used to reduce the tax payable on other sources of income.

In addition to rising share prices, dividend re-investment plans (DRP) can multiply the capital growth effect of a share investment. DRP is an alternative to cash dividends, allowing shareholders to purchase new shares instead of receiving a cash dividend. These shares are often issued at a discount to the current market price and no brokerage is paid.

Capital gains tax (CGT) - Shares enjoy good taxation benefits in comparison to most other investments. You realize a capital gain whenever you sell shares and the consideration received (sale price less related costs such as brokerage) is more than the cost base (purchase price plus related costs).

If the shares were acquired on or after 20 September 1985, the capital gain must be included as assessable income in your tax return and is subject to CGT. CGT is payable at your marginal tax rate in the year in which you sell the shares.

For shares acquired on or after 21 September 1999 and sold 12 months or more after the date of acquisition, capital gains may be discounted by 50%; meaning only half of the capital gains must be included in your assessable income.

Financial control - Shares' flexibility and liquidity are key advantages. In particular, the ease and low cost involved in buying and selling relatively small amounts and the control that gives you; whether to free up some cash, re balance your portfolio or simply realize a profit.

Many people appreciate how easy it is to invest in shares. There is no conveyancing cost, stamp duty or ongoing expenses. You can do everything over the internet if you wish, and brokerage fees are much lower than typical real estate agent fees. So you can start small, buying companies you know, and take the time to learn as you go.

Please note that this is an Australian website. Laws and regulations will differ in different countries. It is of vital importance that you check your tax laws before investing in shares.

This article is based on the ASX share course, version 3 2008, course 3. (http://www.asx.com.au).

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