This article appeared in the March 2011 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

Here are some recent questions sent to ASX – and their answers – to help other investors. ASX Investor Update will publish more educational Q&As in coming issues.

Q & A By Graham O'Brien, ASX

(Editor’s note: Do not rely only on the information in these answers to make investment decisions. They are succinct replies to readers’ questions. You may need to do further research of your own, or talk to your financial adviser, regarding some of the more complex questions.)

Q: What is the minimum amount I need to buy a share?
A: $500.

Q: How do you normally pay for a share?
A: It depends on the broker. Some require cash in the bank upfront, others take payment via BPAY or cheque.

Q: Who pays the broker commission, buyers or sellers?
A: Both pay brokerage.

Q: How are the top companies selected in the index. Is it by price, or size?
A: Companies in an index are selected by a number of factors, the key component being market capitalisation: share price multiplied by number of shares on issue.

Q: Is there an advantage in buying in a float (initial public offering or IPO) compared with buying after the shares are traded on the market (or listed)?
A: Buying in a float does not generally require you to pay brokerage.

Q: If you buy shares in a float do you receive a CHESS statement?
A: No. You will need to contact the appropriate share registry and ask for them to be transferred to your holder identification number (your broker can help with this).

Q: Can you buy shares in a float only through a broker?
A: No. You can purchase shares directly from the company through the prospectus.

Q: What is an ETF?
A: An ETF is an exchange-traded fund that gives exposure to a particular index with a single trade. ASX is holding education seminars on ETFs in March and April.

Q: What is the benefit for a company when it completes a share buyback?
A. Through buying back shares a company reduces available equity and improves its return on equity (return on equity = earnings/shareholder equity).

Q: Do all companies on ASX pay franking credits?
A: Not all, because not all companies pay tax on profits in Australia. Use the ASX Dividend Tool, type in the share code (or search) and look for the “% franked” column.

Q: Are dividend reinvestment plans considered as income by the ATO?
A: Yes, as you are receiving dividends from the company; instead of cash via a dividend you receive units of shares instead.

Q: What is short selling?
A: Short selling means selling something before you own it, hoping to buy back later at a lower price to make a profit.

About the author

Graham O’Brien is an ASX business development manager.

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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