Australian Stock Exchange Investments: Stocks and Risk Analysis

Overview of Major Stock Exchanges

Ordinary shares of stock are usually called common shares and can be purchased on a number of exchanges throughout the world. Some of the more reputable exchanges are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (Nasdaq). Both of these exchanges are based in the United States and are two of the largest in the world.

The Australian Stock Exchange: History and Structure

There are a number of other exchanges throughout the world as well. In fact, the very first exchange was not established in the United States but was formed in Holland, primarily to raise capital for shippers and their seafaring cargoes.

Centuries later, and a world apart, the Australian Stock Exchange (ASX) was founded in response to the then-current system of six separate exchanges located throughout Australia. The ASX "is a relatively new entity, created in 1987. Before its creation, Australian stocks could be traded on six different exchanges — each major city had its own stock exchange" (Background, 2006). The ASX was created to combine all six entities and provide a more comprehensive and efficient method for investors, large and small, to invest in Australian companies.

The ASX initially focused on common shares, but within a decade it added options and warrants to its offerings as well. The exchange currently uses a digital electronic system to track the buying and selling of its various investment vehicles. The very first Australian exchange, however, used a verbal system of calling out the names of stock offers to buy and sell. That method was modified in 1969 to a system of writing names on a chalkboard. A recent article on the Australian exchange noted that "chalkies incessantly scribbled buy and sell orders on chalkboards" (Background, 2006). When the ASX was formed in 1987, the decision was made to transition to a fully digital trading system.

Evaluating ASX-Listed Stocks

The trading methods used by the ASX are similar to those used by other major exchanges around the world, but the stocks traded on the exchange tend to be lower in market capitalization and share price than those found on other notable exchanges, particularly the NYSE and Nasdaq.

Examples of companies listed on the Australian exchange include IINet Limited (IIN), Babcock Ltd. preferred stock (BEPPA), and Fleetwood Corp (FWD). The common stock for IINet Communications was trading at approximately $1.70 per share at the time of this analysis. As its name implies, IINet is a company that provides telecommunication services in Australia. The company's common share price had fallen from $2.41 in February 2008 to a low of $1.28 in July of that year, before rebounding to close at $1.68 on August 18. This recent recovery may be a harbinger of continued upward momentum and would bear consideration for a one-month investment horizon.

If an investor were the type who plots price charts, the chart on this particular stock would show a recent plateau that could allow for bottom fishing on any dips from the current price. Should the plateau continue for the next few days, a purchase at this level might yield a 10–20% gain over the following thirty days. IINet was selected based on the industry it serves and the fact that it lost much of its value over the prior six months due to market risk rather than company-specific risk.

Babcock Ltd. (BEPPA) is a preferred stock offered on the Australian exchange. It was selected due to its dividend and the potential for additional growth once the completion of a scheme to acquire the assets of a general-purpose utility company is finalized. BEPPA was paying a dividend of approximately $2.25 per share on a quarterly basis and was in the process of acquiring all assets of Alinta from Babcock Ltd. This is not a suitable investment for a thirty-day time frame; it is more of a buy-and-hold candidate. The speculative nature of the acquisition means gains, though likely substantial upon completion, are not accessible in the short term.

The third stock, Fleetwood Corp (FWD), could represent a sound thirty-day investment. During the two weeks prior to analysis, FWD dropped from a peak of $10.17 to a closing price of $8.60, establishing a floor of approximately $8.55 over several trading sessions. Any market recovery could produce a 10–15% gain over the following month. For an investor with $5,000 to deploy and a limited appetite for risk, this stock merits serious consideration.

Fleetwood is a relatively large and diversified company that provides modular housing and recreational vehicles to the public. It caters largely to an older, retirement-age population and is significantly more diversified than either BEPPA or IINet. The rationale for preferring FWD over the other two companies is straightforward: the risk is lower, and the potential short-term return is higher. IINet operates in a highly competitive and risky industry, while BEPPA was structured specifically to fund a transaction that carries some possibility of not being completed — a risk that remains real even if relatively low.

Conclusion: Weighing Risk and Reward on the ASX

In a recovery hierarchy, the order is as follows: senior convertible notes are repaid first, followed by regular convertible notes, then preferred shareholders, and finally common shareholders. Rights to purchase stock offer the investor the least protection in terms of capital recovery, since the holder owns only the right to buy company stock at a specified price — not the stock itself.

Understanding this hierarchy is especially important for investors in smaller or foreign exchanges such as the ASX, where research resources may be limited and company disclosures less accessible than on larger domestic exchanges. Selecting the right type of security — not just the right company — is a fundamental part of managing investment risk.

The investor in ASX shares assumes more risk than one who invests in more established exchanges, but the potential reward can be significant. The central challenge is the limited availability of reliable research on the companies listed there and the difficulty of tracking those investments over time. These factors must be carefully weighed, but at the same time, the world is becoming a much smaller place, and navigating investments halfway across the globe is growing considerably easier. For investors willing to do the necessary due diligence, the Australian Securities Exchange offers genuine opportunities — provided risk is managed thoughtfully across security type, time horizon, and company fundamentals.

Background on the Australian Stock Exchange. (2006). Retrieved August 17, 2008, from

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