The share market is a place where people can buy and sell shares and where companies can raise capital by issuing shares to its investors. When you buy shares, you become a part owner of a business listed on the stock exchange. As a part owner, you will receive a proportion of the profits, called dividends, and you will benefit from any growth in the share price.

You can invest in shares directly, or via a managed investment or separately managed account. With a managed investment or separately managed account, the investment manager will research the shares and will then buy or sell on your behalf (as well as for all the other investors in that fund).

If you invest in shares yourself, you will have total control over what you buy and sell. However, you will need to research, compare and manage those shares yourself (unless, of course, your financial planner does this for you).

Why should you invest in shares?

• Over the long term, quality shares rate as one of the highest performing asset classes available

How risky are shares?

• There are 2 main types of risk, but both can be managed:

» The price of a particular share can fall suddenly and dramatically. This risk can be minimised by investing across a number of shares, not just in one share – this is called diversification. Thus, if the share price of one share does fall, the value of your overall investment portfolio will only be affected to a small degree

» The share market in general can experience strongly fluctuating returns. While this can be nerve-racking, the share market has always recovered its value over the medium-term. It is important to ride out any ups and downs and avoid panic selling when the market is at its lowest point

Why do share prices rise?

• Share prices rise because of prudent financial management by the directors of the company

• When the company makes a profit, not all of it is distributed to investors as dividends. Part of the profit is usually retained by the company to re-invest back into the business, for example, to buy better technology, create efficiencies, to buy other businesses, or to break into new markets. If this is done well, the business will generate bigger profits than before

• This cycle continues and over time, the value of the company increases and this is recognised by investors who buy more shares, thus increasing the share price

• In addition, the dividends also increase, which has a positive effect on the share price

What is the dividend imputation system?

• Many listed companies pay tax on their profits before dividends are distributed to you. Those dividends will come to you 'tax paid'

• Your personal tax liability is then calculated after taking into account the tax that has already been paid by the company

• The objective is to ensure that the dividends are not over-taxed

• As a result, investors on the top marginal rate of 48.5% pay reduced tax on 'fully franked' dividends, while investors on lower tax rates either pay no tax on the dividend or qualify for a tax refund

To find out more about investing in shares and whether this option suits you, speak to one of our financial planners at 1300 55 10 45.