May 2007

The 101 on the Australian sharemarket

To some, the thought of investing in the Australian sharemarket scares the living daylights out of them and to others; it provides a real buzz, almost a thrill as they hunt down shares that have been mispriced by the market, only to watch, tick by tick if their purchase appreciates straight away. Somewhere in between, we have investors who are happy to buy and hold quality stocks and include them as part of their overall portfolio, confirming that shares are an important part of any investment strategy.

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Hello and welcome to the first column dedicated to explaining the Australian sharemarket to members and readers of Babes in Business. Ord Minnett is a full-service stockbroker and is pleased to be a sponsor of Babes in Business for the balance of 2007 and over the coming months, this column will provide new information to demystify what many consider to be an asset class that is all 'too hard or too risky'. Over the next few months, topics will include:

• why investors buy shares
• how income is paid to shareholders
• franking credits and their true value
• new share floats (IPOs)
• the risk versus reward of investing in the Australian sharemarket
• the benefits of using a stockbroker to going it alone

And hopefully, during the course of the year, the smoke and mirrors often associated with the sharemarket will disappear.

To begin, what are shares? A share is simply part ownership of a business, bought either on market through the Australian Stock Exchange (ASX) or through an initial public offer (IPO). The latter topic we will be discussing more in a later column, however in both cases, the buyer is purchasing equity in the company and hence taking an ownership stake. In return for investing in the company, shareholders can receive dividends, growth and other benefits. Investors buy shares for primarily one reason - to diversify. We've all heard the saying of 'not putting all your eggs in one basket'. Markets such as shares and property move in cycles and investors can easily fall into the trap of putting all their money into one asset class . While property is the number one asset choice for most Australians, the sharemarket offers true diversification and enables investors to spread their risk.

Additionally, a question that has been asked many times is 'What is the All Ords'? We hear it often enough when we watch the evening news in that it's either up or down, however what exactly is it? As much as we would like to lay claim that the index is named after Ord Minnett, that would not be correct. The All Ordinaries Index is the weighted index of about 500 of the largest Australian companies listed on the Australian Stock Exchange. It is the main measure of the overall performance of the Australian sharemarket. Another measure often quoted is the S&PASX200 Index, which is perhaps a little more self explanatory in that it's an index of approximately 200 of the largest stocks listed on the Australian Stock Exchange. There are many other subgroups of the index however many of Australia's blue-chip companies would fall into the S&PASX200 Index.

Moreover then, what is considered a 'blue chip' share? Generally, a blue chip share is one issued by a company with a long history of growth and stability. They usually pay regular dividends (income) and typically maintain a fairly steady price trend. Everyday companies that we know well are considered blue chip shares, such as AMP Limited, Commonwealth Bank, Rio Tinto, Westfield and Woolworths Limited. In fact, many investors take an active interest in their portfolio by supporting the companies that they invest in. They may shop regularly at Westfield and Woolworths, bank at the Commonwealth Bank and have their superannuation with AMP Limited. Buying blue chip companies are certainly not the only choice available to investors though and many will invest according to their risk profile. A more 'risk loving' investor may seek growth companies, as they are expected to grow at a faster rate than their peers, however an investor who is 'risk adverse' may prefer the blue chips mentioned above, or others in that sector. They could also seek defensive stocks that usually maintain their value during economic downturns. This is one of the most important things to consider when buying shares - what is your risk profile and hence your investment goals.

In summary, the Australian sharemarket provides opportunities to everyday investors to become equity or shareholders in companies listed on the Australian Stock Exchange. It provides one of the best opportunities to achieve long-term goals and gives investors flexibility, diversity and control. We've discussed that this is the primary reason that investors buy shares and discussed a small selection of stocks available on the market. We've also covered the core index measures as they are quoted on the ASX. Next time, the column will focus on income from investments in the share market, most commonly referred to as dividends and the franking credits that are often associated with them.

If you're interested in investing in shares or wish to discuss anything in the column further, please do not hesitate to contact me at Ord Minnett. Ord Minnett is a leading wealth management group, incorporating full-service stockbroking, financial planning, funds management, corporate finance and portfolio services. With a history spanning nearly 150 years, Ord Minnett is one of the best known names in the Australian financial services industry. I do hope that this introduction has been an informative one and I look forward to seeing you all at the next Babes event.

Happy investing ...

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Anne Williamson Ord Minnett Limited p 07 3214 5540 m 0412 292 641 e awilliamson@ords.com.au w www.ords.com.au