Shares, ETF’s and the Australian Stock Exchange (ASX) Simplified.
There are numerous types of securities listed on the ASX. Here we are explaining shares and ETF’s.
What are the types of companies and what are shares?
In general, there are two types of companies. Proprietary Limited (Pty Ltd) companies are privately owned. Shares in these companies cannot be offered to the public. Alternatively, public companies listed on the ASX offer their shares to the public.
There are more than 2200 companies on the ASX divided into 11 sectors depending on the activity of the company.
When you buy a share, you are literally buying a small share in the company. By becoming a shareholder, you become a part-owner of the company. The value of shares rises and falls. The price of shares is determined by supply and demand. The price that buyers are willing to pay and the price that sellers are willing to accept. In general, as a company grows and its cash-flow increases, the price of shares will rise.
In volatile markets other forces come into play. When markets face an abrupt correction (a bear market) the prices of most shares will fall regardless of the performance of the company. Similarly, when markets boom (a bull market) prices will likely increase even if the company has not improved its performance.
What are ETF’s and why are they so popular?
An ETF (Exchange Traded Fund) is a managed fund that is listed on the ASX. When you buy an ETF you are investing in the bundle of assets owned by the ETF. These assets may include shares, bonds, property and other securities. This diversification allows the investor to choose that mix of assets best suited to their risk profile. ETF’s offer low-cost access to a diversified portfolio of assets. This compares to buying a share where you are investing in one company only. The choice of ETF’s is broad with over 320 ETF’s listed on the ASX.
Passively managed ETF’s track an index. This means that the value of your investment in an ETF will rise and fall with the value of that index. While passive investing may seem dull, many studies have shown that, on balance, passive investing outperforms active investing.
Increasingly, private investors are choosing ETF’s over shares. Similarly, passively managed ETF’s are more popular that actively managed ETF’s
In summary, for new investors (and many experienced investors) ETF’s provide a flexible, low cost, diversified and understandable investment.
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