NOTE FROM PEARLER: we do our best to share general resources so you can do your own research. When it comes to tax, this is personal to your investing and financial position. We are not a tax advisor, and don't have any information about your personal situation. When investing, there may be tax implications and you should get advice from a licensed tax adviser.

Do you ever feel like the sharemarket is a complete mystery? With all the technical jargon out there, it can feel like trying to put together a puzzle whilst blindfolded. Against this backdrop, it’s understandable if you feel you don’t yet know how to understand the stock market.

At the Get Rich Slow Club podcast, we know this frustration too well. The sharemarket can be an overwhelming, rather exciting, place if you’re new to the game.

Let’s change that. In this episode, we explain the fundamentals of how to understand the stock market in small, easy-to-understand parts. We also look at how you can make the most of your investments come taxation time.

What is the sharemarket?

First things first: let's define what the sharemarket is. You may have heard people call it by different names. Often you’ll hear the terms stock exchange, stock market, equity market, or sharemarket. But all refer to the same thing.

The sharemarket is a secure and regulated place where people can buy and sell stocks or shares, and other financial securities of publicly held companies. When a company wants to raise money, it can do so by selling shares of its company on the sharemarket. This allows individuals to own a part of the company through their investments.

In Australia, the main stock exchange is the Australian Securities Exchange, also known as ASX. But in other countries like the USA, there are multiple exchanges, including the New York Stock Exchange (NYSE) and NASDAQ.

Did you know that the first stock exchange was the London Stock Exchange, which began in a coffee house in 1773? Imagine discussing shares over a flat white back then!

So, let's say you want to invest in some big-name US companies like Apple, Alphabet (Google), or Meta (Facebook). All of these companies trade on NASDAQ. If you want to invest in Australian companies such as Commonwealth Bank, Telstra or Woolworths, you can find them all on the ASX.

Now, you might be wondering how you can actually invest in these companies. After all, specific countries have their own stock exchanges. But don't let that confuse you. That's where a broker comes in.

A broker helps people buy and sell securities like stocks, bonds, and other investments. We’ll dive later into the details of buying something on the sharemarket through a broker.

What causes the stock market to go up and down?

This is a question that many new investors ask when they're thinking about investing their money in the sharemarket. One day, the market is booming, and the next, it's declining.

It can be frustrating for investors who are just getting started in their wealth journey. But, the truth is, this is a very normal and natural part of the economic cycle.

When the conditions are good, there are more buyers than sellers. The market will go up as more buyers compete to buy the available shares. Conversely, there are more sellers than buyers if the conditions are not favorable for growing money in the short term. The market will go down as sellers compete to offload their shares.

The changes in the market show how buyers or sellers react to different factors. These factors can include:

• Company performance: imagine a company is doing great and achieving its target profits. Investors may be more willing to buy its shares, driving up the price. If the company is struggling, the share price may decline because there are fewer buys.
• Industry and market trends: changes in the overall market or the industry where the company operates can also affect the share price. For instance, a decrease in the economy or a change in what customers want might impact the share price of companies in that industry.
• News and events: big news or events related to the company can also affect the share price. These can be developments about a merger, acquisition, or legal settlement. Good news about a new product release or strong earnings report can cause a rise in share prices. But bad news can make investors hesitant to keep their money in the company.
• Supply and demand: the basic law of supply and demand applies to shares as well. If there are more buyers than sellers, the price will go up. If there are more sellers than buyers, the price will drop.
• Market sentiment: if investors feel positive about the future of the stock market, they may be more willing to invest in it. Optimism can drive the prices higher. If investors are pessimistic or uncertain, they may be more likely to sell their shares (which pushes down the price).

It's important to remember that the sharemarket is always changing because of these factors. Historically, the sharemarket has always risen over time (even if it takes a decade or more). As such, it's very normal to have dips along a long investing journey. Having said that, past performance is no guarantor of future returns. The key is to stay focused on your long term goals and have a well-diversified portfolio to manage risk.

What to consider when researching a broker

To buy shares on the sharemarket, you need to use a broker. A broker is a company that facilitates the buying and selling of equities. Imagine that each country has its own manufacturer of chocolate. The manufacturers are kind of like the sharemarket. And each of these factories produces various brands of chocolates.

Just like how you can buy chocolate from Coles or Woolworths, you can buy shares through different brokers. The cost may differ between brokers, but you're still purchasing the same product.

Fortunately, there are plenty of low-cost options available (like Pearler!) that allow you to access the ASX and the US exchanges as well. The easiest way to access a broker is to simply google "investing broker in Australia" and see which one suits your needs. So, what should you consider when researching a broker?

• Fees. Firstly, you want to make sure the fees are low enough so that they don't eat into your profits.
• Access to exchanges. Secondly, you want to consider access to exchanges. Some brokers may only offer access to certain exchanges. With this in mind, you’ll want to ensure your broker offers access to the exchanges you're interested in.
• Automation features. Thirdly, automation is another aspect to consider. Do you want your broker to automatically rebalance your portfolio for you? Do you want them to reinvest dividends automatically? Make sure you choose a broker that offers automation features that align with your investment goals.
• Ease of use. Fourthly, you want a broker that's user-friendly. If you are a beginner investor, you’ll appreciate an intuitive interface and easy-to-understand reports.
• CHESS-sponsored. Lastly, you'll want to make sure your broker is CHESS-sponsored. If your shares are CHESS-sponsored, you hold them in your name, rather than the broker's. In the next section, we’ll dive into the reasons how CHESS sponsorship gives an added layer of protection to your investments.

What is ‘CHESS-sponsored’?

In this episode, we dive into the importance of CHESS-sponsored shares to keep your investment safe from contingencies. CHESS stands for ‘Clearing House Electronic Subregister System’. ASX uses this system to keep track of who owns shares, and to manage the buying and selling of shares. Other countries use different central clearing houses for buying and selling securities. If you own CHESS-sponsored shares, it means you directly own each share and their responsible share registries.

Should the company you invested in go bankrupt, you will still own your shares. This is different from custodial models, where you might lose your investments if the custodian company goes bust.

This isn’t just a hypothetical risk, though. Several major custodial stockbroking and funds management firms have collapsed in Australia over recent years. Often the clients waited for years to access their investments, or what's left of them.

What can you buy on the sharemarket?

Before we get started, let's recap a little. If you haven't listened to our episode on the most popular types of investments, we highly recommend it. In it, we break down what you can invest in based on your risk tolerance, financial goals, and investing horizon.

In the sharemarket, you can typically buy and sell shares of individual companies and bonds. Other investment options are exchange-traded funds (ETFs), real estate investment funds (REITs), and even gold through ETFs.

Individual companies (stocks/shares)

The first type of investment you can buy on the stock exchange is individual companies. Whether you call them stocks or shares, both are the same thing: a small piece of ownership in a company.

Investing in a single company can be risky since your investment's success depends on the company's performance. If the company does well, though, you can earn money as a return on your investment.

Bonds

When you buy a bond, you're essentially lending money to a company or government. In return, they'll pay you back with interest. Bonds are generally considered to be less risky than shares. And that’s because they offer a predictable return on your investment.

Exchange-traded funds

Now, let's focus on ETFs, which are a popular investment option for long term investors. But what exactly are ETFs? In essence, they’re a basket of different investments, such as shares or bonds. Just like individual shares, ETFs are traded on the stock exchange.

ETFs are popular among investors because they offer diversification in a single investment. When you buy an ETF, you are essentially buying a small piece of that basket. This means that your investment is spread across different sectors and companies. Hence, ETFs offer a simple and cost-effective way to invest with diversification and risk management in mind.

Real Estate Investment Trust

REITs are your option if you want to invest in the property market without buying a physical property yourself. REITs are companies that own and manage real estate properties. They pay out a portion of their profits from rental income to investors in the form of dividends. We’ll talk about dividends later.

Gold ETFs

You can also invest in gold ETF. These are exchange-traded funds that are backed by physical gold. Gold ETFs allow you to invest in gold without having to physically own and store it. Depending on your own investing strategy, you can buy gold as a hedge against inflation or market volatility.

Why choose ETFs

Think of it this way: an ETF is like a box of assorted chocolates. Sometimes dark chocolate is the tastiest. But if you don’t like white chocolate, those may not satisfy you as much. Still, on some days, you crave for a taste of different flavours other than dark chocolate.

Similarly, the idea is you have a bucket of diverse shares and aren’t just betting on a few to do great. Having all of them, then, can be a safer bet.

So why invest in ETFs? Well, for starters, they can be a great option for beginner investors who want exposure to different sectors. Are you looking for high growth potential? There are ETFs out there dedicated to technology and healthcare. Are you exploring conscious investing? You can find ETFs that focus on ethical and sustainable investing. Or maybe you feel excited about buying a piece of the Australian or US economy. In that case, ETFs that track an index such as S&P 500 or ASX 200 might be for you.

Secondly, ETFs are typically cheaper than mutual funds because they generally have lower management fees. ETFs are passively managed since they track an index rather than trying to beat the market. Lastly, you also have the flexibility to buy and sell them throughout the trading day.

If you're interested in buying ETFs, you can do so through an online broker or an investment app like Pearler. But before making any investing decisions, there’s a newbie investor checklist you should go through. It's also important to do your own research into the type of investment.

What are dividends?

Dividends are a hot topic in the investing world, and for a good reason. Dividends are payments made to the shareholders by the company in either cash or additional shares. In other words, if you own shares in a company, you are entitled to a portion of their profits.

When a company pays a dividend, it’s giving some of its profits to its shareholders. This is usually a good thing for investors. It means the company has extra money that it can give to its shareholders every quarter or every year.

However, it's important to understand that not all companies pay dividends. Some may reinvest their profits back into the business or use them to pay off debt. Those that do pay dividends can provide a useful source of cash flow for retirees or investors seeking passive income.

You might be wondering how you can receive dividends. Your dividends can be deposited into your account if you want to receive the payment in cash. A share registry can also hold your dividends until you have enough to buy more shares through a dividend investment plan (or DRP). This is an option to use your dividends to work for you instead of getting cash payments.

If you want to learn more, check out this article on the perks of focusing on dividends.

What is a shares registry?

It's an organisation that manages the registry of shareholders for a company. A shares registry keeps track of changes in ownership and provides shareholding statements. They also manage dividend payments, bonuses, and rights issues.

Now, when you purchase ETFs, you will need to visit the website of the share registry. You need to create an account to give instructions on how to treat your dividends. This is something that brokers, like Pearler, don't manage for you.

There are three main share registry companies in Australia. These are Computershare, Link Market Services, and BoardRoom. They send you share letters, and it's essential to read these. Doing so is an important part of keeping track of your investments and staying aware of any changes or updates.

Keep in mind that it may take up to two weeks for an initial investment register at the share registry level. So, don't be alarmed if you don't see your shares or ETFs reflected immediately.

How do you get taxed?

Let's start with the basics. The way you get taxed on shares in Australia depends on a few different factors. Firstly, you’ll need to know whether you're a resident or non-resident for tax purposes. Secondly, how long you've held the shares. And finally, whether you receive any dividends or capital gains from the shares.

• Capital gains tax (CGT): If you sell your shares for more than you paid for them, you may need to pay CGT on the capital gains. But what if you've held the shares for more than 12 months? Here’s the good news: you may be eligible for a 50% discount on the CGT you owe. Let’s say you're a non-resident. Unfortunately, you might have to pay non-resident withholding tax on any money you make from selling things. This means that the Australian Taxation Office (ATO) will hold back a part of your capital gains to ensure that you pay the right amount of tax.

• Dividends: If you receive dividends from your shares, they will generally be subject to tax. However, if you receive franked dividends, this means that the company paying the dividends has already paid tax on the profits it made. As a result, you may be eligible for a tax credit, which can help to reduce the amount of tax you owe.

It's important to note that taxation laws can be complex. The information provided here is a general overview only. That's why it's always a good idea to seek professional advice from a qualified tax accountant or financial advisor. They can help you meet your tax obligations and take advantage of any tax benefits that may be available to you.

What are franking credits?

One of the important terms we mentioned in the previous section is franking credits. But why is this important for you? As a shareholder, you can use franking credits to lower the amount of tax you have to pay on the dividends you get. If the franking credits are more than the tax you have to pay, you can even get a refund for the extra amount.

Let’s break it down for you. The company tax rate in Australia is 30%. If your personal tax rate is also 30%, your dividends are pretty much tax-free! Why? You get credit for the 30% tax the company has already paid.

However, if your personal tax rate is 45%, you pay 15% on dividends after subtracting the tax credit paid by the company.

Franking credits are designed to prevent double taxation of company profits. Without franking credits, the company would pay tax on its profits. Meanwhile, shareholders would also then have to pay tax on the dividends they receive from those profits. If you want to explore your potential franking credits obligations, check out Pearler’s franking credits calculator.

Listen to the episode

Investing in the sharemarket doesn’t have to be complicated or intimidating. We hope this article helped clarify the basic concepts so that you feel more confident to move forward in your investment journey.

We’ve covered a lot of ground in this article, but there’s still so much more to learn. If you want to dive into the details, you can listen to the entire episode below.

Happy investing!

Tash & Ana