The risks and benefits of

shares

Week 2 Lesson 1

Accounting

YEAR 10

Feb 2015

Learning Intention:

Develop an understanding of the risks and benefits of share ownership

Success Criteria:

Able to take notes efficiently

Able to identify and explain the risks and benefits of share ownership

Feb 2015

GKR

Think, Pair, Share

Would you like to be rich?

What does being rich mean to you?

Do you have any ideas on how to get rich?

How old do you think you will be when you are rich?

Do you think there will be risks in becoming rich?

Feb 2015

Key Vocabulary:

• Risk

• Volatility

• Legislative

• Stabilising

• Adverse

Feb 2015

Activity – Handout 1

• Create your own definitions

– Look at each of the sentences in Handout 1. Study how each word (in bold) from the vocabulary list is used.

– Now create your own definitions for each of these words.

6Wk1-L1 Dec 2014

Risks

• It doesn’t matter what the investment, there is always an element of risk. For shares the risks are:

– Risk of capital loss

– Volatility risk

– Timing risk

– Risk of poor quality advice

– Legislative risk

– Currency risk

Feb 2015

Risk of Capital Loss

• Having to sell shares at the price much lower than the original purchase price.

• No longer able to trade shares if the company fails and is delisted (can’t be traded anymore).

• If the company goes into liquidation, company assets are sold. The shareholder may suffer a complete loss or only get back a fraction of their original investment (their capital).

Feb 2015

Volatility Risk

• Share prices can rise and fall rapidly.

• Investors must accept that the value of their shares may fluctuate by as much as 50% or more in a year.

• General market risk can relate to a particular sector, e.g. mining shares are usually more volatile than industrial shares such as bank shares.

Feb 2015

Timing Risk

• There are market cycles.

• Some shares have a higher degree of risk when the overall sharemarket has risen sharply and is set for a reaction.

• Other shares have a higher degree of risk when the market goes into a strong decline, then starts to recover after some signs of stabilising.

Feb 2015

Risk of Poor Quality Advice

• Have you got your information on which shares to buy from a qualified advisor or have you got your information from hearsay or the neighbour next door?

Feb 2015

Legislative Risk

• Changes to current laws can influence your investment strategies or even individual investments.

Feb 2015

Currency Risk

• You invest overseas, e.g. in the USA.

• The Investment costs US$50 which equals A$55.00 (the value of the A$ is A$1.10 against the US $ at the time of investment)

• You sell for US$60 and bring your profits back to Australia

• You only get back $48, a loss of A$12. Adverse conditions caused the A$ to drop to A$0.80 for every US$.

Feb 2015

Brain Break

Feb 2015

Benefits

• Just as there is always an element of risk in any investment, of course, there are also benefits.

– Capital growth

– Dividend income

– Capital gains tax

– Financial control

Feb 2015

Capital Growth

• Capital growth occurs when the value of your investment increases.

Feb 2015

Dividend Income

• A dividend is the distribution of a company's net profit to shareholders.

• The amount of dividend paid varies greatly from company to company. (A company does not have to pay a dividend).

Feb 2015

Capital Gains Tax

• Capital gain is what you get whenever you sell shares and the amount you receive is greater than it cost you.

• How can a tax be a benefit? Although tax is payable on the capital gain, unlike other investments, the tax on shares is not as high.

Feb 2015

Financial Control

• Shares have the advantage of flexibility and liquidity.

• You have greater control over shares compared to other assets such as real estate. It is relatively easy and inexpensive to buy and sell relatively small amounts of shares.

Feb 2015

Feb 2015

Review:

1. Go to Infuse Learning Room 93646 and complete the quiz Shares - Risks and Benefits

2. Identify a learning strategy you used today.

Bibliography

• http://www.asx.com.au/documents/resources/shares_course_03.pdf?shares_course_03_text

• http://www.investopedia.com/ask/answers/05/industrysector.asp

Feb 2015

Week 2

Introduction to Sharemarket

..\..\Shares\Shareholder Lessons\Lesson_1.pdf

Feb 2015