Saturday, 7 July 2012

Aussie Bank Shares V Term Deposits

A number of people have said to me, "you are far better off having your money in term deposits than in the stock market in these uncertain times".

My answer to them is, "think about a bank as a business, you are giving your hard earned cash to them, to use how they want (to make money) in return to give you a small percentage".

Lets look at a live example. I invested $10 000 in the purchase of 500 WBC (Westpac Bank).  Over the year I had 2 dividend payments from the investment amounting to $810 paid to me.  They where fully franked meaning that the amount of money paid to me had tax paid on them by WBC.  A little like an employer paying your wages and paying the tax on your wages for you.  The facts are that I had received a payment of 8.1% of my $10 000 investment with tax already paid on the earnings.  At the end of the financial year this will be added to the tax my employer has paid on my income, a gross income will be derived and a possible refund may be received.  Coupled to this is the share price of WBC.  They went from the $20 I paid a year ago to $21.74 (today's price).  This price will fluctuate from day to day but in the long term should continue to grow.  So my $10 000 investment has grown $870 in value over the year, I have earned $810 with tax paid on it.

Compare this to the $10 000 invested in a term deposit with WBC.  The current rate is 4.55%.  Over a year of term deposit I would receive $455 paid to me.  At the end of the financial year I would have to declare this income and pay tax on the income at the rate decided by my gross income.  I in real terms have only made about 25% of return as the share investment.  Disregarding the share price growth, only 50% of the income as that invested in the WBC share purchase.

I hope this makes sense to my readers.  To me it is straight forward, but to many they may never have considered it.

This related link may be worth a read.

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