Investing in shares can help build long-term wealth, but it’s important to understand how markets work, the risks involved, and the building blocks of returns. From the S&P/ASX 200 to diversification and franking credits, getting across the fundamentals supports clearer, more confident decisions.

This article covers:

• What the S&P/ASX 200 represents

• Diversification – what it is and why it matters

• How dividends and franking credits work

• When tax applies on shares

• Share prices vs valuations – the difference

What does diversification mean in investing?

Diversification means spreading your investments across different assets, sectors, or markets so that no single holding determines your portfolio’s outcome. For instance, if you have $100,000 and invest equally across 20 companies, you hold $5,000 in each. If one company underperforms, the others help to offset any impact.

Put simply, diversification reduces concentration risk associated with  overexposure to a single company, sector, or market – but it does not eliminate overall market risk. If the broader share market declines, a diversified portfolio will still fluctuate, but generally to a lesser extent than one concentrated in a single area.

A practical example: owning property across multiple cities spreads exposure beyond one location, but if the national housing market falls, values may still decline overall. The same applies to shares.

With equities, diversification can occur at several levels: by sector (e.g., financials, healthcare, resources); by company size (large, mid, small caps); and by geography. For Australian investors, combining ASX-listed holdings with exposure to the US and Hong Kong markets can broaden access to industries not represented locally, such as global technology or consumer brands.

This is one reason investors may choose to hold both domestic and international shares – it can help to balance portfolio risk and smooth returns over time.

Exchange-traded funds (ETFs) can provide easy access to diversification. They bundle multiple securities into a single trade and can include both local and global companies. You can start investing from as little as $500 on the ASX, which is the minimum investment for buying shares on the ASX for the first time.

You can explore international diversification through Selfwealth’s platform, which provides direct access to Australian, US and Hong Kong markets in one trading account. 

What is the S&P/ASX 200?

The S&P/ASX 200 is Australia’s main share market index, maintained by Standard & Poor’s. It tracks the performance of 200 of the largest companies listed on the ASX by market capitalisation.

When the ASX 200 rises, it generally means the share prices of many of those 200 companies have increased (weighted by size). If you hear “the ASX 200 finished down 2 percent,” it simply means the Australian share market fell by about that amount on average.

While the ASX 200 focuses on domestic companies, investors can also look to major global indices for broader opportunities. 

Dividends and franking credits

Dividends are distributions of a company’s profits to shareholders. Boards decide whether to pay them and the amount; payments are not guaranteed. In Australia, dividends are typically paid twice a year, and may offer a Dividend Reinvestment Plan (DRP) as an alternative to cash.

Key points about dividends:

• They are not guaranteed and can vary over time.

• Payment of dividends can be in either cash directly to a bank account or trading account, or as additional shares of a stock.

• Dividend announcements are released to the ASX, often alongside company results.

• Dividends may include franking credits, depending on eligibility.

Franking credits represent company tax already paid on profits in Australia and are recorded against your name at the ATO when you receive a franked dividend. For eligible shareholders, franking credits can reduce or offset personal income tax. To qualify, you generally must hold shares for at least 45 days (exceptions apply).

For example, a fully franked dividend from an Australian company such as Telstra (ASX: TLS) or Commonwealth Bank (ASX: CBA) includes franking credits that can reduce the tax you owe, depending on your personal tax situation.

Tip: “Fully franked” means the dividend carries the maximum franking credit – not that it is necessarily “better” for every investor. Suitability depends on your own tax position.

When is tax paid on shares?

You report investment income and capital gains each financial year when you complete your tax return (for the year ending 30 June). Two main types of tax apply to most individual investors:

1) Capital gains tax (CGT).
As an example, if you buy a share for $10 and sell it for $25, the $15 profit is a capital gain that forms part of your assessable income. If you hold the shares for more than 12 months, you may be eligible for the 50 percent CGT discount (subject to ATO conditions).

Tip: Your accountant can help apply CGT rules, cost base adjustments, and the discount correctly.

2) Income tax on dividends.
Dividends are taxable income, although franking credits may offset the amount owed. Short-term trading profits are generally treated as ordinary income and don’t qualify for the CGT discount.

ETF holders receive an annual tax statement from their fund provider. It breaks down distributions by category – such as Australian income, foreign income, or capital gains – which may differ from the cash amount received.

Share prices vs valuations – what’s the difference?

A share price is what the market currently pays for it; its valuation is what analysts estimate the business is worth based on expectations of future performance. They are not necessarily the same.

Analysts use several methods, including:

• Ratio analysis (e.g., price-to-earnings, dividend yield)

• Discounted cash flow (DCF) models

• Internal rate of return (IRR) or scenario analysis

Because valuations depend on forecasts, two analysts can arrive at different conclusions. For example, one analyst might value BHP at $40 per share, and another at $30. Both could be reasonable depending on their assumptions about the company’s growth and risks.

Tip: Broker “price targets” are estimates, not guarantees. Use them as one input in your research, not as certainty. 

Ready to invest?

From diversification and risk to the factors that influence company value, building knowledge of the fundamentals of investing can support more informed and confident decision-making.

With Selfwealth, you can trade ASX, US and Hong Kong shares from one trading account, with flat-fee pricing and access to international markets. It’s a simple, accessible way to put investing principles into practice and manage a portfolio that reflects your financial goals.