CHOICE guide to buying shares

The plunging share market is attracting bargain hunters. CHOICE guides first-time investors through their options.
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06.Dictionary and useful websites

  • Blue chip shares While the term might convey a perception of safety or quality, blue chip really refers to the size of a publicly listed company. In fact, the original term came from the gambling world, as casinos’ highest value chips are blue. There’s no strict rule for what qualifies: one definition says companies need a market value of $1 billion, but to put this in context, Australia’s largest company, BHP, is worth about $168.75 billion.
  • Averaging in Also known as “dollar cost averaging”, is a strategy for buying shares by regularly investing. You might decide to put $100 into a share fund on the first Monday of every month. As the price of shares rises and falls regularly, your $100 will buy more shares when prices are weak and fewer shares when their prices are higher. Over the long run, the prices average out. This approach doesn’t guarantee profits, but can smooth the ups and downs.
  • Share index A way to measure the value of a basket of shares. The S&P/ASX 200 index, for example, represents the market value of our 200 largest public companies. It’s a “capitalisation-weighted” index, meaning that the size of a company determines what proportion of the index it represents. A change in BHP’s share price, for example, would have a bigger effect on the index than the same percentage change in a smaller company’s share price.
  • Points The value of most share market indices is measured in “points”, which represent the value of all the companies with shares on the index – for example, in mid-March the S&P/ASX 200 was at about 3200 points.
  • Price-to-earnings ratio This is a share’s price divided by the company’s annual earnings per share. It’s one of the key measures used to assess the attractiveness of a share’s price for investors, although it’s just one part of the puzzle.
  • Dividend yield A dividend is what’s paid from company profits to shareholders. The dividend yield is the annual dividend divided by the company’s share price, expressed as a percentage. You can choose to receive your dividends as a regular income (they’re usually paid every six or 12 months), or use the dividends to buy more shares (known as a dividend reinvestment plan).

Useful websites



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