Types of shares: A simple breakdown

When you begin investing, you’ll encounter a variety of share types, each with its own characteristics. Understanding these differences is key to building a portfolio that suits your goals. Here is a breakdown of the most common types of shares available to Australian investors.

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Ordinary Shares

The most common type of share is the fully paid ordinary share (FPO). These are often called just “ordinary shares” or simply “shares.” They are the “plain vanilla” option of the share market, without any special conditions or frills. When you own an ordinary share, you get voting rights in the company and have a claim on its profits and assets.

Preference Shares and Hybrids

Preference shares are a type of share that gives you a “preferential” or superior right to a dividend. This dividend is often fixed at a set rate, meaning it’s more predictable than the dividends of ordinary shares. However, preference shares typically do not come with voting rights.

Some preference shares are convertible, meaning they can be converted into ordinary shares at a later date. These are also known as hybrids, and are often issued by major banks to raise capital.

Contributing Shares

A contributing share is issued at a partial price, with the remaining balance due in future installments, known as “calls.” These types of shares are now rare and are generally only issued by mining companies.

Listed Investment Companies (LICs)

A Listed Investment Company (LIC) is a company that doesn’t sell a product of its own. Instead, it makes a profit by investing in and trading the shares of other businesses. By buying shares in a LIC, you can instantly diversify your portfolio, as your investment is spread across many different companies. The trade-off is that you lose control over which companies you own and may incur management fees, which can reduce your overall return.

Other Types of Securities and Rights

• Company-Issued Options: These are issued by companies and give you the right (but not the obligation) to buy a certain number of shares at a specific price before a set expiry date. They are not shares until you “exercise” the option.
• Rights: Similar to options, rights are issued to existing shareholders to raise more capital for the company. They allow you to buy additional shares at a discounted price for a limited time.
• Bonus Shares: These are additional shares given to existing shareholders for free as a type of reward. This practice is now relatively rare.

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Investing in Australian vs. International Shares

The Australian share market is a small part of the global market, accounting for only about 1.5% of the world’s total. For this reason, many Australian investors consider adding international shares to their portfolios to diversify.

However, direct international investing has many complications, including currency exchange rates and higher trading costs. A much easier way to get exposure to international shares is by investing in an Australian-listed Exchange Traded Fund (ETF) or LIC that holds a portfolio of international shares for you. This way, you get the benefit of global diversification without the direct complexities.