The working of financial markets Just as all goods and services have a price, so does money. The price of using money that belongs to someone else is called interest. When you deposit money in a bank, the bank pays you interest on your savings. For example, if you deposit $100 and the bank pays three per cent per annum, you earn three dollars in interest after a year. Interest is usually calculated monthly or daily, so if you withdraw early, you get less. Banks lend out deposited money to other consumers or businesses, charging a higher interest rate to borrowers than they pay to depositors, thus making a profit. Financial markets operate like any other market, with sellers aiming to get the best price for their goods and services, while buyers want to pay the lowest price. Depositors want the best interest earnings for their money, and borrowers want to pay the lowest interest.
Share market
Like other markets, the stock market (also called the share market) is simply a relationship between buyers and sellers. In this case it is shares in companies that are bought and sold. A share is a unit of ownership in a company. Large companies divide their ownership into millions of shares, which can be bought and sold through the stock market. In Australia, this is the Australian Securities Exchange (ASX). The ASX was formed in 1987 by merging the stock exchanges of the six capital cities. Today the ASX is based in Sydney, but also has offices in Perth and Melbourne. Over 2,000 companies are listed on the Australian Securities Exchange (ASX), including Woolworths and Wesfarmers (owner of Coles), the four big banks (ANZ, CBA, NAB, and Westpac), and large mining companies such as BHP Group Limited.
FIGURE3 Buying shares listed on the ASX enables you to become a shareholder in a variety of different businesses.
The value of shares can fluctuate based on supply and demand. When a company reports strong performance, increased investor interest can drive share prices up. If a company is under performing, shareholders will seek to sell, causing share prices to decline. As the price of a company’s shares goes up or down, so too does the value of a shareholder’s investment. The value of most shares tends to rise over time, even though the prices can fluctuate daily. People who hold shares for long periods (generally more than 10 years) benefit from capital growth . Owning shares means you can also benefit when the company makes a profit, as profits can be distributed to shareholders as dividends or in extra shares. Did you know? You don’t need to be a stockbroker to buy shares! While licensed stockbrokers trade on the ASX for a fee and often recommend spreading your investments across different companies to reduce risk, you can also buy shares yourself online. Platforms like CommSec and CMC Markets Invest let you trade shares with as little as $600.
TOPIC21 Understanding tax and consumer literacy 619
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