Understanding Asset Classes: Equities
When a SMSF makes an equity investment it is effectively becoming a part owner in a company by taking an equity stake in the fortunes of that company. The proportion the SMSF holds in the company is its ‘share’, hence the expression of it being a ‘shareholder’.
Shares in companies do not have maturity dates as the company continues to operate as management changes over time and even as the nature of the underlying business of the company changes. That said, companies can be merged taken over or go out of business.
Direct and easy access to the Australian equity market has proved popular with SMSFs. The ability to buy and sell shares on-market provides liquidity for investors to manage a share portfolio. The price at which shares trade is determined by what sellers are will to sell for and buyers will to pay.
Types
Domestic shares
The Australian share market is a similar size as the Australian economy, however, accounts for a small proportion of the global equity market.
While there are over 2,000 companies listed on the ASX, it is characterised by a few large companies that participate in a few sectors such as, resources and financial services. The top 200 companies account for around 80% of the total value listed with many SMSFs holding a high proportion of investments in this grouping.
This domestic bias is not unusual as it reflects the greater understanding SMSFs have of local companies with easy access to real time news and information domestically.
Australian companies pay dividends from profits after tax and the payout ratio for Australian companies is high by global standards.
International Shares
Having so much of the global equity market outside Australia and with many more sectors beyond resources and financial services available, there may be a case for SMSFs to consider diversifying away from the domestic bias of only holding Australian shares.
However, with many global share markets trading when it’s night in Australia, it may be difficult to make direct share investments and keep an eye on real time news and information. For this reason, it may be useful to consider using an investment manager who specialise in international shares. This could be achieved by investing with though a managed fund, where the manager, who may be based in the international market, has the expertise to make investment decisions for investors.
Global companies tend to have lower payout ratios than do Australian companies, choosing to reinvest earnings back into the company to achieve growth over the medium to long term
Risks
Share prices can be volatile and move significantly over short time frames. As a result, investors may not be able sell at an acceptable price or even sell at all if there are few or no buyers in the market.
With international shares, there are also currency considerations, which provide another dynamic as currency fluctuation can affect outcomes in terms of both growth and income.
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