What you'll learn in this step: As taxation applies to all investments, it helps to be aware of elements such as capital gains tax and franking credits.

The money we make from shares usually comes in the form of dividends or capital growth. The dividends you receive need to be included in your annual tax return as does the capital gain or loss you may have incurred upon selling shares.

Dividends and franking credits

In 1987 dividend imputation was introduced. Before that date companies would pay tax on their income, then pay your dividend from their net profit. You would then have to pay tax on your dividend. In effect, the Tax Office was taxing the money twice. Franking means that if the company in which you have invested has paid tax at the full corporate rate of 30 per cent, you in turn will get a tax credit on your dividends for the tax the company has already paid.
Some companies don't pay the full tax rate in which case your dividend payments are only partly franked.
Franking credits on your dividends can make shares a very attractive investment option.

When filling in your tax return, don’t forget to claim any of your imputation (franking) credits. You can find out this amount from the dividend statements that you receive. If you do not normally lodge a tax return, you can claim a refund on these credits from the Tax Office.

Some companies offer dividend reinvestment plans where your dividend is automatically used to purchase shares in the company. Some people view this as a form of enforced saving. Even though you haven’t received the dividend in your hand, you must still include the amount in your tax return.

International shares

The Australian sharemarket only comprises 2 per cent of the global sharemarket so you should have exposure to overseas markets if you want to be where the action is. While there are a number of brokers such as TD Waterhouse and the Commonwealth Bank through which you can buy international shares, the easiest way to invest in overseas shares is through managed funds.

Speculative investments

Speculative investments should only be made with money you don't mind losing and should never amount to more than about 10 per cent of your total portfolio. The recent rout of technology stocks should be a lesson to all investors who invested blindly in speculative stocks.

Traders and investors

Some people choose to be traders rather than investors. Traders only hold stock for a short period of time, trading in and out of the market while trying to capture profits. Being a trader requires a lot of time, energy, understanding and research and usually people give up their day job to trade full-time.