The Share Market
Understand how the share market works, the role of the ASX, how to read share prices, and the relationship between risk and return.
How Stocks Work
A share (also called a stock) represents partial ownership of a company. When you buy shares in a company, you become a shareholder and own a small fraction of that business. Companies sell shares to raise capital for growth, research, or operations.
Shareholders can make money in two ways: through capital gains (selling shares at a higher price than they paid) and through dividends (a portion of the company's profits distributed to shareholders). Share prices fluctuate based on supply and demand, company performance, and broader economic conditions.
How a Share Transaction Works
🏢
Company lists on ASX
Issues shares via IPO
💰
Investor buys shares
Through a broker or platform
📈
Price changes over time
Capital gains or losses
The ASX & Reading Share Prices
The Australian Securities Exchange (ASX) is the primary stock exchange in Australia. Over 2,000 companies are listed on the ASX, from major banks and mining companies to small technology startups. The ASX 200 index tracks the performance of the 200 largest companies by market capitalisation.
Each listed company has a unique ticker code (e.g., BHP for BHP Group, CBA for Commonwealth Bank). Share prices are quoted in dollars and cents, and key metrics include the opening price, closing price, day's high and low, and trading volume.
Sample ASX Share Data
| Code | Company | Last | Change | Volume | Div Yield |
|---|---|---|---|---|---|
| BHP | BHP Group | $45.20 | +1.2% | 8.3M | 5.1% |
| CBA | Commonwealth Bank | $112.50 | -0.4% | 3.1M | 3.8% |
| CSL | CSL Limited | $285.70 | +0.8% | 1.2M | 1.2% |
Risk vs Return
A fundamental principle of investing is the risk-return trade-off: higher potential returns generally come with higher risk. Shares historically offer higher long-term returns than savings accounts, but their value can fall significantly in the short term.
Diversification is the strategy of spreading investments across different assets, sectors, and regions to reduce overall risk. The saying "don't put all your eggs in one basket" captures this concept perfectly.
Risk Spectrum
Key Vocabulary
Share (Stock)
A unit of ownership in a company. Buying shares makes you a part-owner of that business.
Dividend
A payment made by a company to its shareholders from its profits, usually expressed as cents per share.
Capital Gain
The profit made when you sell an asset (such as shares) for more than you paid for it.
Diversification
Spreading investments across different assets and sectors to reduce the overall risk of a portfolio.
Worked Examples
Calculating a capital gain
Aisha bought 200 shares of XYZ Ltd at $8.50 each. She sold them a year later at $11.20 each. What was her total capital gain?
Step 1: Purchase cost: 200 x $8.50 = $1,700
Step 2: Sale proceeds: 200 x $11.20 = $2,240
Step 3: Capital gain: $2,240 - $1,700 = $540
Answer: Aisha made a capital gain of $540 (a 31.8% return on her investment).
Calculating dividend income
Ben owns 500 shares of ABC Corp. The company pays a dividend of $0.85 per share. How much dividend income does Ben receive?
Step 1: Identify the dividend per share: $0.85
Step 2: Multiply by number of shares: 500 x $0.85 = $425
Answer: Ben receives $425 in dividend income.
Reading a dividend yield
A share is priced at $50.00 and pays an annual dividend of $2.50 per share. What is its dividend yield?
Step 1: Dividend yield = (Annual Dividend / Share Price) x 100
Step 2: ($2.50 / $50.00) x 100 = 5.0%
Answer: The dividend yield is 5.0%, meaning for every $100 invested, you receive $5 in dividends per year.
Knowledge Check
Select the correct answer for each question. Click "Check Answer" to see if you are right.
Question 1
What does owning a share in a company make you?
Question 2
You buy 100 shares at $12.00 each and sell them at $15.50 each. What is your capital gain?
Question 3
What does the ASX 200 index measure?
Question 4
Which investment strategy reduces risk by spreading investments across different assets?
Question 5
A share is priced at $40.00 and pays an annual dividend of $1.60. What is the dividend yield?
Key Concepts Summary
- ●A share represents partial ownership of a company listed on the stock exchange.
- ●Investors can earn returns through capital gains and dividends.
- ●The ASX is Australia's primary stock exchange; the ASX 200 tracks the top 200 companies.
- ●Higher potential returns generally come with higher risk.
- ●Diversification reduces risk by spreading investments across different assets.