Ownership Structures of Investments Part B

Order Kerney Whalbury and a waddery woman. And before we get started on She's on the Money podcast, I would like to acknowledge the traditional custodians of the land of which this podcast is recorded on a wondery country, acknowledging the elders, the ancestors and the next generation coming through as this podcast is about connecting, empowering, knowledge sharing and the storytelling of you to make a difference for today and lasting impact for tomorrow.

the ownership structure to be different. No, no, no, that's just how an ETF functions. Whereas with your trusts or your sole trader or your individual shareholdings, like that's all your choice and you can hold it however you want. Whereas this is more what you need to consider when buying

shares and what that actually looks like. And I feel like our community has said a number of times things like, oh well, if it's not Chess sponsored, you shouldn't be buying it, and I don't necessarily agree with that, So we want to, I guess, break down all of those things that I feel can be really overwhelming at the start of an investment journey where you're like, hold on, I was just going to buy an ETF. Well do you mean to have to think about chess ownership structure

or what's this or what's that. That's what this episode is about to hopefully give you a bit more independence, but also I guess confidence to go no, no, no, like I am where I am and I'm starting here and that's okay, sure, okay, and all of those terms and everything. We will discuss a little bit later in the episode, but yes, we were speaking about this a

couple of weeks ago. Basically the different structures we could set up personally to own shares, and you promise that you'd give us a part B and explain the different ownership structures that shares, ETFs.

teeny tiny part owner of that company. My favorite way of looking at it is kind of like a pie chart, and you took a really tiny sliver of the pie and now it's your slither of the pie. And what that does is it actually entitles you to any of the growth and profit of that company because you're a little baby shareholder, like you're the owner of the company.

So why should you care about that? Well, owning shares can potentially give you a chance to grow your money as the company's value increases over time, and hopefully that company is doing so well that they're paying dividends. A dividend is a profit that is distributed to the shareholders of a company, and you just reinvest that money. Compounding interest is what that is called. And over time, money that your money has made starts making more money and that becomes a really attractive beck.

don't know why, let's change it. You're going to buy a Combank share individually and Bechsaed is the owner, whereas you might go and buy an ETF or a managed fund that holds Combank. Combank doesn't know that Beck is the owner. What Combank knows is that ETF or that fund you've put your money into, they own a significant portion of that share. And that's how it's broken down.

It's just an ownership structure. And as we'll get into it, we'll talk about I guess the pros and cons, but they are kind of much of a muchness in this day and age, like in theory. I do get that I do want to know more about the pros and cons, But why should I choose direct ownership? Okay, so I guess to summarize it, pros and cons are good. Direct ownership means that you actually get to choose the companies

that you get to invest in well. Indirect ownership offers more diversification, being able to spread your investment across multiple companies so you can diversify your risk. Direct ownership, as I said, it kind of puts you more in the controls seat. You get to choose which companies align with your personal values and goals. Plus, if those companies perform well, your returns can actually be quite rewarding.

smart financial decisions. That kind of like onus, and the responsibility is far more on you.

We'll get into that, but essentially what you're doing is investing in a basket of companies instead of just one direct company, which reduces the impact of you know, if one company isn't doing so well and you just went invested in that one, like you're going to feel all the losses, whereas if that one was one of two hundred beck it's a lot more consistent, it's a lot

more level. You're getting more consistent returns. And to me as somebody who likes a more indirect approach to investing, because I think I've mentioned it before on the podcast, I do own ETFs, right, and I would argue that I don't want to say like one of the best investors. That's not what I mean at all. But like I'm very educated in this space. I used to do wholesale direct investing for ultra high netwalth clients. Well, I know how to do that. I don't want to do it.

It's so much responsibility. Beck I love an ETF like it works for me and my personal situation because as much as I adore investing, don't get me wrong, don't tell anyone, but I do like to have a little bit of a punt on the side. I do like finding a share that makes sense to me and reading annual reports and investing. But that's such a small part

of my investment portfolio because to me, that's fun. And if we look at the statistics, we know that index funds and edfs outperform investors who are trying to chase return. So like me chasing return and picking my individual stocks, it's not going to put me in a better position long term, so gotcha. Essentially, it reduces the impact if one of the companies that you pick doesn't perform well, and professional fund managers they essentially handle all of that

for you. So say a company isn't performing that well in your ETF and it's one of two hundred, they might go, We're going to bullet it because they go and do all the research and they look into it and go, you know what, We're going to bullet that bank and replace it with this other one. It means that there's a more hands off approach and you kind of have some professionals in the background. Okay.

other securities that they want to hold. Managed funds are typically overseen by what they call a professional funds manager, so that one usually white dude, Like there are female fund maashes that aren't many of them. This is obviously something that the average investor might not do. You might just go, oh, this one performs really well, Like you might go to a particular managed fund and go, I want to know more about it, but you just look

at the investments. I go and look at the investments, and then I go look at the fund manager and go, who is he? Where has he worked before? What are his values? What are his morals? What's his tenure look like? Has he been working with this particular company for a year? Is he new? Has he been there for ten years? I'm honestly, I can't be trusted, so I like to do that. But essentially, this usual dude actively manages investment

decisions on behalf of the investors. So Becky you don't have to make that decision because they're going to do it for you. Sure, and the aim is to achieve that fund's objectives. So that fund might have different objectives. So a fund might have the objective to meet the industry benchmark, So they might go, look, this fund is just investing in the top two hundred different shares on the ASA, and our plan is actually just to stay on track with what the market does. Great, no worries.

There are funds out there that have the aim of beating the benchmark. There are funds out there that have the aim of doing lots of different things. Make sure you know that aim before you get into a fund, because it might not align with your value. Sure, if you're someone who's like, you know what, I want a really low touch ETFU managed fund, I'm just going to

pick one that has the top two hundred. Make sure that the two hundred that they're picking are trying to meet the benchmark, not exceed it, because that would be a different risk profile. Again, because obviously if they're trying to be way more aggressive, like that's going to be a different situation than just like, oh, I just want to track the average of the average so ETF's on the other hand, they're a type of fund that tracks

the performance of a specific market index or sector. So I'll give you an example, and ETF might track the SMP five hundred, which is essentially the top five hundred companies in America. I've heard about this one. Yeah, that's

really standard. Often when you're like watching the news, so like you know, like the little scrolling bar at the bottom of the news, the SMP will usually be reported there, and a lot of people will be like, I don't know what that means, And it might be like a little green arrow going up or a little red arrow going down, or the yellow bar that's telling you if the SMP five hundred went up that time or down,

or if it just stayed on track. So they might track the s and P five hundred, or they might track like a technology sector and only invest in tech companies. Just like managed funds ETFs, they pull all of your investors' money together into one big bucket and they invest in

a diversified basket of assets. However, instead of being managed actively, so there's no one like Grampooba who's like making decisions every day making sure everything's tracking ETFs are usually passively managed, and their aim is to replicate the performance of their underlying index or sector. So like if it's the technology sector that I mentioned just before, they just go, oh, well, Beck, we've put together this list of twenty tech com The plan is to just get an average return of what

the tech industry returns. You're okay, no worries. That makes sense. No, they're not harder to buy. That was your question before. Yes, they're not harder. They're not more complex. In fact, they are identical to buying a share, Beck. They are listed in exactly the same way on the AX. You buy them on a share trading platform, exactly the same way you would buy an individual share. There's nothing more complex about the purchase of them.

the XAO. It tracks the top or the largest five hundred companies in Australia that are listed on the AX according to their market capitalization, so basically how big they are, and that will change over time, like if a company decreases in value, they might drop off the All odds and another company that's worth more comes on, So essentially

the top five hundred largest companies in Australia. It's commonly referred to as the All ords because it's actually considered the benchmark index for gauging the performance of the broader

Australian market. So the All Odds was originally calculated in I think it was nineteen eighty with a starting level of five hundred and represents close to ninety percent of the AX, so it's not like a little bit of the ASEX, it's a lot of the ASX and it's essentially a good way of quickly checking in and seeing how's the Australian market doing. If the all odds are down right, it means that ninety percent of the ASX

is on its way down. There must be something going on in the economy that is, you know, pushing it down. If the all odds is up, it means the economy is doing really well. So it's kind of like that one number that's like a really good sense check or a pulse check to see what's our market doing. Is it okay? And it's a good idea to track this if you're an investor, not because you're going to invest in it, but because you want to have your finger

on the pulse. And it can be really jarring. Right as a baby investor you've just started, You're like, oh, my gosh, my whole portfolio is completely off. Do you know what makes you feel a lot better? Looking at the all odds and saying, ah, the broader economy is a little bit off. Sure, this makes sense. So this

is one of those things. I'm in the middle of writing my investing master class, and this is something that you know, I asked the community a little while ago, just in the Facebook group, because I haven't announced it publicly that I'm doing that. Listening to this on the pod, You're welcome, But we're writing an investing mask glass, and I said, what do you want to know? Like, obviously I can write everything that I know about the stock market and what that actually looks like, how to do it?

What to start? And someone's question, I can't remember who it was, so do apologize? It was my favorite question? Yet She's like, what does it actually mean to do your research? So I go back, you know, before investing, do your research? What the heck can is invest in research? How do I do that?

bit of a sense check? Beck, Like, what if you're a bit stressed, how do I do a bit of research to make sure that I can just still feel a little bit comfy in the market? The all odds is something that I would look at first to go what's the broader economy doing If that's off, what makes sense that your shares are off? Beck because the whole economy is a bit messed up, right now, gotcha? That

might make you feel a bit more comfortable. But yeah, the all odds is actually really important, and I'm glad you brought it up.

a one or two percent jump, gotcha. But it'll always be small amounts and it's just like slow fluctuations. And then if you look at it over the broader, like you know, scale of time, because we say on the pod lame that it's my favorite saying when in doubt, zoom out, like look at the bigger picture back. You might see that the all lords over time are just slowly tracking upwards. That's reflective of a really healthy market. Or you might see it tracking downwards, like going into COVID,

we saw the all lords track downwards. Going into any type of recession, we see it track downwards, and you can see how fast or slow that is and go, oh, that's happening pretty quickly or that's actually really slow. It's interesting once you know what it is. Yeah, Okay, I won't go on and on about it because I totally go it.

tojam pack them full of information that hopefully you get. Yes, I can't expect you to walk away. It's like going to a lecture. Did you listen?

oh absolutely. All right, So let's start with chess, okay, because it sounds the most like a game, and I feel like it's most spoken about in our community as well. So put simply, chess is clearing house electronic subregistered system, oh sexy. So essentially that means that the AX is just keeping a list of who owns what chess. That's what chess means. Okay, So it's the clearing house electronic subregister system. It's just registering everybody who owns shares in

the ASEX. So if you go and purchase a share on the ASEX, they want to keep track of everybody. That's what CHESS does. So if your shares are quote Chess sponsored, it means that when you buy or sell shares on the ASEX, it has a record of you

owning the shares directly or not. And this is the main way in Australia that people buy and sell shares because they go to a broker, They might go to an online platform purchase a share and then they will get a whole heave of paperwork, usually from computer share that says you now own this, here's your chest number, here's this, here's that, and it's just tracking that you're

the actual underlying owner of that asset. Just be aware when it comes to choosing a broker for buying and selling these because some brokers are and some brokers aren't Chess sponsored. Don't mean they're worse or different. It's just something that you need to understand and we'll obviously get into those different arrangements soon. Okay, So I'm not going to go on and on about it now because I know I've got a round coming soon.

directly if you're the underlying owner of them. So that's essentially the profit the company pays to its owners, i e.

people are honestly, wildly passionate about this. You might see it all over the internet if you are someone like me who is this embarrassing. Might be troll's reddit forums about like what shares are being bought and sold, in people's opinions on different ETFs, like I'm gonna need to know all of that information, right, But a lot of people will be like, it's terrible because it's not chess sponsored and you're not the direct owner of it. Rare anyway,

I could not care less. But some people, as I said, are wildly passionate about it. But as someone who does arguably know the industry very well and invests in ETFs and managed funds directly, it doesn't worry me because all my investments are still safe and are still secure, and essentially what my shares in my ETF and managed funds

are operating under is what's called a custodian model. So that all sounds very complex, you could say, but a custodian model essentially means that someone else is currently holding that share certificate on my behalf. It's all above board if either of those companies, like let's say the shared trading platform that I have picked, operates under a custodian model, which means that the etf I board or even sometimes the share that I buy isn't going to be my

direct name. It's under this custodian model. You might go, but what if they go bankrupt, Victoria, what if they lose all their money?

and essentially the owner of the share. It isn't as clear as if it was responsored, but there still is a direct line of working that out, and that company can't just yeed off with your shares, Like, you're not going to lose out in that circumstance. The only way you would lose out, and you know there might be an issue with your share is if your share actually loses value, but it wouldn't have anything to do with your broker. However, in that custodian model, your shares are

actually held within a trust. So remember in the first episode we were talking about trusts and direct ownership. Companies can set up trusts to hold their client's assets. So my shares are currently being held in a trust by my custodian, which is my broker, and they're not going to go missing if that company goes bankrupt or they

shut down. So you're okay. And I think a lot of people get really worried about that because they're like, oh, but someone's going to, you know, take off with my shares because they've got my share certificate and I'm like, not so quick, Like, that's not how it works.

It's actually very simple. It means hold up identification number. Again. It's just a number that tracks who owns what and when and where, which is essentially like an ID card or an ID number for your shares. It's not super complex. You don't need to be super across it. Just know that each time you would buy, you would be, you know, given a HIN. It's essentially just to track your shares so the ASEX knows who owns what and when and where.

M mmm, beck. You also asked about an SRN, So you're gonna have an SRN if you buy shares with the registry, So youon know how I said before, you get a HINT if you go with a stockbroker. If you go directly with the registry, you're actually gonna get an SRN, which stands for Security Reference number. Again just another ID number, okay, which is unique to each company's shares that you own. So both of which are honestly just acronyms for numbers you're gonna get when you register

your investments. So no matter which way your shares are held, you remain ultimately the beneficial owner even if the stockbroker or the registry goes bankrupt. Oh so you're okay, you safe safe. These are tracking numbers, So if you get them in the mail, or you get them in your emails, save them somewhere important, in a folder in your emails, or like my favorite, I don't care paper in my house,

I'm gonna lose it. But you know what if I don't lose pieces of paper in my house, I I have been on the phone and I flip them over and I draw all over us lists and then I rip them up like it is not a good idea. So I actually take photos of all of mine and just save them in an album in my phone, or I email them to myself. But definitely keep track of these numbers because ultimately they are important, but you're not going to use them every day when you're doing share trading.

me so proud. I'm like, oh, so you're just worried about where a dividends is going to go?

or through your etfor managed fund. You might have picked what's called a dividend reinvestment plan, which means they never give you the cash. They actually just reinvest it back into the same ETF for you. So it's all automated, which can be really helpful because if you're planning to invest over the long term and you own a share, you know, and let's pretend it paid you ten dollars this year, you don't want that ten dollars this year.

You want it reinvested into the share market so that it can grow over time and then when you reach retirement you can make use of it. But that's what I mean when I say the money that your money makes makes money is because the money that your money made gets reinvested, and then that money makes money. So that ten dollars that gets reinvested, then you know, might make a dollar next year, and then that dollar makes

money and it just compounds from there. Okay, So it doesn't necessarily mean that you're missing out, but it might get filtered through a different way, but those profits are still yours. And like, for example, if Combank says that they're paying a dividend to investors, that is still going to come to you. Sure you don't miss out?

portfolios and manager that way. If your hands on and you want to pick your own companies, like direct ownership might actually be your own style, Beck, But if you're looking for diversification, maybe a little less involvement, maybe a little less risk. Because when you diversify more, Beck, you're lowering your risk. So the more diversification you have, the

more risk you have. Maybe indirect ownership is a better fit because you go, well, I can get instant diversification less involvement if I go and buy a top two hundred asx ETF, And that might make you really comfortable. But again, you might be widely passionate about picking your own shares, or maybe you don't want the top two hundred, or maybe you just want a bit more control. So it's really going to depend on who you are and what you do. And as I've said, you know this

is what I do, but I do both. I'm not saying that both is right for you. I do both because let's be honest. Direct share investment for me is me having a good time in the share market. I love it, Beck It's so lame, like I love not my research. I love looking at new companies and what they are made up of, and what their board looks like, and what their CEO has done historically and how they've performed.

That is not everybody's cup of tea. Everybody else in our community, or a lot of people in our community might turn around and be like, V we hear you, we see you. We understand the importance of investing. We know that to create financial freedom, we want to invest. But I just want to send some money into an investment every month and not think about it again. Ye,

you're a psychopath. I am not going to be looking at the annual reports of each and every single company, because one, I don't comprehend them, but I also just don't care. That's fair and that's so fair. So I think that understanding the difference between indirect and direct investing

is going to be a really personal decision. But I think the crux of this episode is helping you to understand that when we talk about HIN or SRN or chess, those things are not as important as a lot of people, you know, jump up and down about and say, Oh, it's so important. That's chess sponsors so you have direct control. I personally don't need direct control. What I want is to know that if everything goes south, my investment is going to be safe, irrespective of who was the custodian

of that. And I know I'm safe, so I'm fine. And I think that a lot of people in our community wanted to hear that, because you go, well, if it's not chess sponsored, maybe it's less secure, and that's not the case at all. So that's where I'm at. But it's going to be a personal decision, not a decision that I can make for you, because I don't know you well enough. I wish I did, so let's hang out.

the reporting. Yourself managed options like a managed fund or an ETF, they actually handle most of the regulation for you. So that's kind of an attractive thing. We won't Maybe I'll do a whole episode one day on regulation, but it won't be that sexy. Sure, maybe will do it as a bonus for people who are just like me, because I know you will not give two flying fruit bats. I've already yeah, you're like, no, I don't even know why I asked you the.

how these work. I think we need to also remember there's no such thing as a one size fits all approach, and as I said before, choose the method that aligns to your goals and your values, not just what someone on a Reddit thread said was the most important thing. Honestly, great advice. Don't take Reddit as gospel.