Coaching Centre
Shares, dividends and capital gains
Buying and selling shares with brokerage, dividends and dividend yield, capital gains and losses, total return, and reading share price graphs.
When you buy a share, you buy a tiny piece of a company. If the company does well, two good things can happen: it can pay you part of its profit (a dividend), and other people may pay more for your share than you did (a capital gain). If it does badly, neither happens and your share can be worth less than you paid. This is why shares carry more risk, and usually more reward, than a bank account.
Buying and selling: brokerage
Shares are bought and sold on the Australian Securities Exchange (ASX) through a broker, usually an online trading app. The broker charges a fee called brokerage on every trade: either a flat fee, a percentage of the trade value, or the larger of the two.
- Cost to buy $=$ number of shares $\times$ price $+$ brokerage.
- Money received when selling $=$ number of shares $\times$ price $-$ brokerage.
Brokerage is added when you buy and subtracted when you sell, because both times it comes out of your pocket.
Dividends and dividend yield
A dividend is a share of the company's profit paid per share, usually twice a year. It is quoted in cents per share. The dividend yield compares the yearly dividend with the share price, so you can compare shares with very different prices, or with a bank interest rate.
The yield depends on which price you use. Questions usually say "based on the purchase price" or "based on the current price". A rising share price means a lower yield for new buyers, even if the dividend hasn't changed.
Capital gains and total return
A capital gain is the profit from selling for more than the total cost of buying. Selling for less gives a capital loss. The total return adds the dividends received.
Noah buys $400$ shares in a solar energy company at $\$12.50$ each. Brokerage is $\$19.95$ per trade. Over the next year the company pays two dividends of $45$ cents per share. Noah then sells all his shares at $\$14.10$.
Choose when to buy and when to sell on the two-year price chart. Can you find a buy and sell month that turns a capital loss into a gain once the dividends are counted?
Set $400$ shares, buy at month $0$ and check Example 1's dividend yield.
Reading a share price graph
Share prices are shown as line graphs over days, months or years. Describe them in terms of the overall trend (rising, falling or flat) and the volatility (how much the price jumps around). A share that rises steadily is lower risk than one that swings up and down, even if both end at the same price. Past performance does not guarantee future results.
Your turn
Mei buys $800$ shares at $\$6.25$ with brokerage of $\$20$ per trade. She receives dividends of $18$ cents and $22$ cents per share, then sells at $\$7.10$. Find her total return and her percentage return on the cost.
Show the working
Cost $= 800 \times 6.25 + 20 = \$5020$. Received $= 800 \times 7.10 - 20 = \$5660$. Capital gain $= \$640$. Dividends $= 800 \times 0.40 = \$320$. Total return $= \$960$. Percentage return $= \dfrac{960}{5020} \times 100\% \approx 19.12\%$.
A share pays dividends totalling $\$1.20$ per year. Its price is $\$24$. Find the dividend yield, as a percentage.
$\dfrac{1.20}{24} \times 100\% = 5\%$.
Find the total cost of buying $250$ shares at $\$8.40$ each with brokerage of $\$15$.
$250 \times 8.40 + 15 = 2100 + 15 = \$2115$.
Jack owns $1200$ shares. The company pays a dividend of $32$ cents per share. How much does Jack receive, in dollars?
$1200 \times 0.32 = \$384$.
Ignoring brokerage, Zara buys $600$ shares at $\$5.20$ and sells them at $\$4.65$. Find the size of her capital loss, in dollars.
Loss $= 600 \times (5.20 - 4.65) = 600 \times 0.55 = \$330$.
A capital gain is:
Capital gain is the increase in the value of the asset itself, measured when it is sold.
A broker charges $0.11\%$ of the trade value. Find the brokerage on a trade worth $\$18\,000$.
$0.0011 \times 18\,000 = \$19.80$.
A company pays an annual dividend of $84$ cents per share. At what share price would the dividend yield be $4\%$? Answer in dollars.
$\dfrac{0.84}{P} = 0.04$, so $P = \dfrac{0.84}{0.04} = \$21$.
Share A costs $\$30$ and pays $\$1.50$ a year. Share B costs $\$16$ and pays $96$ cents a year. Which has the higher dividend yield?
A: $\dfrac{1.50}{30} = 5\%$. B: $\dfrac{0.96}{16} = 6\%$. B has the higher yield even though it pays fewer dollars per share.
Exam style: Mei buys $800$ shares at $\$6.25$ and later sells them at $\$7.10$, paying $\$20$ brokerage on each trade. While she owns them she receives dividends of $18$ cents and $22$ cents per share. Find her total return in dollars.
Cost $= 800 \times 6.25 + 20 = \$5020$. Received $= 800 \times 7.10 - 20 = \$5660$. Capital gain $= 5660 - 5020 = \$640$. Dividends $= 800 \times (0.18 + 0.22) = \$320$. Total return $= 640 + 320 = \$960$.
Exam style: Noah's shares paid $90$ cents per share last year. They were bought at $\$12.50$ and are now trading at $\$14.10$. Find the dividend yield based on the current price, as a percentage to $2$ decimal places.
$\dfrac{0.90}{14.10} \times 100\% \approx 6.38\%$. This is lower than the $7.2\%$ yield on the purchase price, because the price has risen while the dividend has not.