Wed 10 Oct, 2018

Fundamentals of Investing in Shares With an SMSF

Whether you’re an experienced equities investor or not, investing in shares with an SMSF has some differences. In this article, we will explain the basics of investing in shares with an SMSF, including the advantages and disadvantages of this asset class and how you can get started on your investment strategy today. 

What are Shares?

Shares, or equities, are defined as units of ownership in a corporation or asset, that can yield an equal proportion of profit via the payment of dividends.

When choosing shares to invest in, you have three options to choose from: direct stocks, index funds or ETFs.

Nuts of wisdom: shares are one of the top three most popular SMSF investment asset.

Direct Stocks

Direct stocks are essentially units of part ownership in a business. You can invest in any given amount, and stand to yield dividends at a proportion of the total pool paid out to shareholders.

Example:

You decide to invest in a major supermarket and buy 1000 shares for $1 per share. Over the year, they generate $50 million in revenue and make the decision to payout $25 million back to their shareholders in the form of a cash dividend.

If there are 12.4 million shares outstanding, each stock would be worth $2.01. So if you owned 1000 shares, you’d stand to get $2,010 - a $1,010 return on your investment.

Index Funds

Index funds are collections of stocks from any number of different corporations. The shares are designed to track a certain index – like the S&P 500, for example.

Within these collections, half of stocks must be below average, and the other half must be above average. That’s why this type of investing is quite popular. With an index fund, you essentially own the whole market - rather than an individual company.

ETFs

ETFs - or Exchange Traded Funds - are sort of a hybrid - you trade them like a stock, but they offer you the diversification of a mutual fund.

Similar to index funds, you can use ETFs to invest in a variety of asset classes, like stocks, bonds, and commodities. However, ETFs can give you more flexibility.

Which Share Should my SMSF Invest in?

Fundamentals of Investing in Shares with an SMSF | Squirrel Super


This depends on the type of investment vehicle you want your fund to be, and your risk level as a trustee.

Direct stocks allow you more control over the corporations you invest in. These shares could allow you to invest in ‘cherry picked’ opportunities. However, there are greater risks in choosing the ‘right’ stock. There are also transaction fees to consider when buying and direct stocks.

Index funds on the other hand, have the benefit of being low cost. This is due to the fact that they are not ‘managed funds’ and can be far less time consuming for a trustee to manage. They also require less knowledge and understanding of a corporation’s financial position. However, with an index fund - you could miss out on some unicorn investment opportunities.

ETFs also have the appeal of low cost for investors as they too are not actively managed. However, the main benefit to investing in ETFs is its transparency. With an ETF, investors know exactly what assets the share holds. They also have exposure to the indicative price of the ETF. On the other hand, a risk to investing in ETFs is  that the bid-ask spread can be large, increasing the cost of the share. Investors looking to invest in ETFs may also be limited to larger companies only, limiting investors in their share options.

How Can Shares Help Grow Your Super Balance?

Investing in shares with an SMSF can help your fund grow in value by providing robust returns on your investments without sacrificing liquidity. Your fund receives income from shares both by way of dividends and capital gains upon sale of the share or index fund.

Remember that with an SMSF, you are in full control of your super and its investments. This means the responsibility of generating returns on your investments is completely up to you.

If you’re ready to take control of your super, and start investing in shares, speak to one of our SMSF experts today!

Benefits of Investing in Shares with an SMSF

Shares are sort of the ‘happy medium’ of the SMSF investment class world. Shares are a great way to diversify a fund’s investment portfolio while maintaining an element of liquidity. Trading on the stock exchange can be much faster than selling other assets, like property, meaning wealth tied up here can be converted to cash fairly readily.

There are some tax incentives to investing in shares with an SMSF. If you’ve held a stock or fund for more than 12 months, your capital gains tax is reduced when you sell, and any cash flow income you make from dividends is taxed at the SMSF concessional rate of 15%.

Nuts of wisdom: once you commence a pension from your SMSF, the capital gains tax rate is reduced to 0% – nuttin’! 

Drawbacks of Investing in Shares with an SMSF

As with all investments, both inside and outside of an SMSF, there are risks. The share market can be particularly volatile, and values move up and down very quickly. Investing in shares and index funds can be time consuming, too, particularly if you want to keep a close eye on your investments and respond to market changes.

Shares are one of the few investments where the value can actually reach $0. While investing in other asset classes, like property, carries its own risk, something pretty dramatic would have to happen for the value of a house to reach $0. But when investing in shares, the value of the share reaching $0 is a possibility.

Beware of unexpected events, and accept that some things are out of your control. If you are unsure of whether investing in shares with an SMFS is right for you, it’s best to speak to a qualified financial adviser. 

Before You Begin Investing in Shares with your SMSF

Fundamentals of Investing in Shares with an SMSF | Squirrel Super

All investment decisions within your SMSF must be in line with your investment strategy and compliant with your trust deed. So it’s important to speak to your SMSF administrator about making any necessary changes to avoid a run-in with the ATO.

It’s also worth bearing in mind the ATO’s view on investing in shares with an SMSF. The ATO has strict rules and regulations on the type of share investing you can and cannot do.

There is a fine line between investing in shares with the sole intention of growing your fund for retirement, and operating your fund in a business-like manner. Fund members are permitted to engage in share ‘trading’, but only in a non-business capacity. The ATO has some hairy rules around this, so it’s worth speaking to a qualified SMSF administrator if you’re unsure.

Nuts of wisdom: with a Squirrel SMSF, you will receive unlimited customer service to our SMSF experts. While we cannot provide personal financial advice, we can advise you on the rules your SMSF needs to follow in order to stay compliant with the ATO.

Contact us to learn more about how you can start investing in shares with an SMSF today!