Investing in the Stock Market -- Lesson 2
January 21st 2008 10:00
What is a Share?
A share is a parcel of the equity of a company. The equity of a company is made of its assets less its liabilities. So, a shareholder is a part-owner of a company.
A shareholder has no entitlement do dividends. Dividends are issued at the discretion of management of the company.
The amount a shareholder stands to lose with its investment is the paid-up value of its shares – and no more.
Upon liquidation of the company, shareholders rank last. This means that liquidators, employees, creditors and others are paid ahead of shareholders. This also means that shareholders may not get anything in liquidation.
In Australia, dividends may attract franked credits. This happens if the company in question has earned its income in Australia and has paid income tax on it. Franked credits can then be offset against the shareholder income tax. If the dividend’s franked amount is 100 per cent, this means the shareholder will not pay any income tax on these dividends.
The issuance of franked credits makes dividends very competitive against interest. In fact, when you earn interest you pay full income tax on it while when you are paid fully franked dividends you don’t.
A Company’s Financial Statements
The financial statements for a company are three: Profit and Loss, now called Statement of Financial Performance; Balance Sheet, now called Statement of Financial Position and Statement of Cash Flows.
The Profit and Loss statement puts marketing, administration and financial expenses against sales to arrive at a net profit. This is then offset against tax payable to give the net profit after tax. The Profit and Loss purpose is to show the business performance within a period of time.
The Balance Sheet statement shows the assets, which are what the company owns, liabilities, which are what the company owes, and equity of a company. Liabilities plus equity equal assets. Assets and liabilities are further broken down into current and non-current amounts. The Balance Sheet purpose is to show the financial position of a company in a particular moment in time.
The statement of Cash Flows shows the operating, investing, and financing cash flows for the period. At its bottom it shows the net cash at the end of the period. The Cash Flow statement purpose is to account for the flows of cash after cancelling items such as depreciation and amortisation which don’t have a cash side to it.
You can find a company’s financial statements in its annual report to shareholders. This can be found in a company’s website under shareholders.
A share is a parcel of the equity of a company. The equity of a company is made of its assets less its liabilities. So, a shareholder is a part-owner of a company.
A shareholder has no entitlement do dividends. Dividends are issued at the discretion of management of the company.
The amount a shareholder stands to lose with its investment is the paid-up value of its shares – and no more.
Upon liquidation of the company, shareholders rank last. This means that liquidators, employees, creditors and others are paid ahead of shareholders. This also means that shareholders may not get anything in liquidation.
In Australia, dividends may attract franked credits. This happens if the company in question has earned its income in Australia and has paid income tax on it. Franked credits can then be offset against the shareholder income tax. If the dividend’s franked amount is 100 per cent, this means the shareholder will not pay any income tax on these dividends.
The issuance of franked credits makes dividends very competitive against interest. In fact, when you earn interest you pay full income tax on it while when you are paid fully franked dividends you don’t.
A Company’s Financial Statements
The financial statements for a company are three: Profit and Loss, now called Statement of Financial Performance; Balance Sheet, now called Statement of Financial Position and Statement of Cash Flows.
The Profit and Loss statement puts marketing, administration and financial expenses against sales to arrive at a net profit. This is then offset against tax payable to give the net profit after tax. The Profit and Loss purpose is to show the business performance within a period of time.
The Balance Sheet statement shows the assets, which are what the company owns, liabilities, which are what the company owes, and equity of a company. Liabilities plus equity equal assets. Assets and liabilities are further broken down into current and non-current amounts. The Balance Sheet purpose is to show the financial position of a company in a particular moment in time.
The statement of Cash Flows shows the operating, investing, and financing cash flows for the period. At its bottom it shows the net cash at the end of the period. The Cash Flow statement purpose is to account for the flows of cash after cancelling items such as depreciation and amortisation which don’t have a cash side to it.
You can find a company’s financial statements in its annual report to shareholders. This can be found in a company’s website under shareholders.
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