eBusiness Weekly
Dr Keen Mhlanga
You must realise that you may invest in a number of stock market products to take the proper steps toward becoming a seasoned investor.
Shares, derivatives, mutual funds, and bonds are examples of these types of investments. The stock/equity market, in particular, has roughly 18 million investors.
In other nations, such as India, stocks or equities account for roughly 12,9 percent of total investments. When a firm needs money to expand or meet operational needs, it has two options: borrow money or issue stock that gives investors a piece of the company. The lowest denomination of a corporation’s stock is a share, which represents a percentage of the corporation’s ownership.
A share is a unit used in financial markets such as mutual funds, limited partnerships, and real estate investment trusts. A share, in simple terms, is a unit of ownership in a certain corporation. When you say you’re a shareholder of a firm, it means you own a part of the issuing company as an investor. As a shareholder, you will benefit from the company’s earnings while simultaneously bearing the costs of the company’s losses.
Shares exist as a financial asset for certain firms, allowing for an equitable distribution of any leftover earnings, if any, in the form of dividends. Shareholders of a stock that does not pay dividends are not entitled to a profit distribution. Instead, they expect to benefit from rising stock prices as the company’s profits rise.
Preference shares, equity shares, and non-voting ordinary shares are the three categories of shares that make up a company’s equity stock. These shares are different in terms of their qualities and the regulations that govern them. Ordinary shares or common shares are other terms for equity shares.
The bulk of the company’s shares are equity shares.
The secondary or stock market is where this form of share is actively exchanged. These shareholders are entitled to vote at corporate meetings. They are also entitled to the board of directors’ stated dividends. The dividend on these shares, on the other hand, is not fixed and may change from year to year depending on the company’s profitability. After preference shareholders, equity stockholders get dividends.
Companies issue equity shares to investors in return for capital, which is used to grow and operate the firm. Unlike debt capital, obtained through a loan or bond issue, equity has no legal mandate to be repaid to investors, and shares, while they may pay dividends as a distribution of profits, do not pay interest. Nearly all companies, from small partnerships or Limited Liability Companies to multinational corporations, issue shares of some kind.
Most companies issue common shares. These provide shareholders with a residual claim on the company and its profits, providing potential investment growth through both capital gains and dividends. Common shares also come with voting rights, giving shareholders more control over the business.
These rights allow shareholders of record in a company to vote on certain corporate actions, elect members to the board of directors, and approve issuing new securities or payment of dividends. In addition, certain common stock comes with pre-emptive rights, ensuring that shareholders may buy new shares and retain their percentage of ownership when the corporation issues new stock.
Preference shares as the name suggests, this type of share gives certain preferential rights as compared to other types of share. The main benefits that preference shareholders have are that they get first preference when it comes to the payout of dividend, which is a share of the profit earned by the company and when the company winds up, preference shareholders have the first right in terms of getting repaid. Further, there are three sub-types in preference shares namely cumulative preference shares, non-cumulative and convertible preference shares.
Cumulative shareholders have the right to receive arrears on dividend before any dividend is paid to equity shareholders. For example, if the dividends on preference shares for the year 2017 and 2018 have not been paid due to market downturns, preferential shareholders are entitled to receive dividend for all preceding years in addition to the current one. Non-cumulative shareholders cannot claim any outstanding dividend.
These shareholders only earn a dividend when the company earns profits. No dividends are paid for the prior years. As the name suggests, these shares are convertible. Convertible shareholders can convert their preference shares into equity shares at a specific period of time.
However, the conversion of shares will need to be authorised by the Articles of Association of the company. In comparison, preferred shares typically do not offer much market appreciation in value or voting rights in the corporation.
However, this type of stock typically has set payment criteria, a dividend that is paid out regularly, making the stock less risky than common stock. Because preferred stock takes priority over common stock if the business files for bankruptcy and is forced to repay its lenders, preferred shareholders receive payment before common shareholders but after bondholders. Because preferred shareholders have priority in repayment upon bankruptcy, they are less risky than common shares.
The last class of shares are the non-voting ordinary shares which carry the same conditions as ordinary shares except with regards to voting rights.
Shareholders under this category may have voting rights under certain circumstances or they may have no voting rights at all. When establishing a corporation, owners may choose to issue common stock or preferred shares to investors. Shares of privately held companies or partnerships are owned by the founders or partners.
As small companies grow, shares are sold to outside investors in the primary market. These may include friends or family, and then angel or venture capital (VC) investors. If the company continues to grow, it may seek to raise additional equity capital by selling shares to the public via an initial public offering (IPO).
After an IPO, a company’s shares are said to be publicly traded and become listed on a stock exchange. This fits the description of Zimbabwe’s stock-exchange market which has over 65 companies listed for shares sale. Over the past few years there has been an unanswered question as to how buying shares under stock-exchange market benefits investors.
Stock markets like the Zimbabwe Stock Exchange and the Financial Securities Exchange provide a trading platform where shares of publicly held companies are sold and bought. Stock exchanges are an invaluable source of capital for businesses. Without stock markets, businesses would largely resort to borrowing huge loans which must be repaid with interest from banks or individuals with well-oiled pockets.
Fortunately, businesses in both the developed and developing world can issue shares to the public, raising vast amounts of cash that doesn’t come along with a repayment burden. When businesses have access to such capital, they can easily expand their operations and create more job opportunities.
From a national perspective, this will lower unemployment levels, and enable a government to earn move revenue from business taxes. For investors, stock markets are huge auction houses. Every day, investors are buying and selling their shares.
This makes securities a liquid investment. When investors want to exit an investment, it is quick and easy to find a buyer. Most companies reach a level whereby additional capital is required to be infused to fund the company’s growth or expansion plans.
Going public is thereby a method of overcoming these constraints. And by listing on a Stock Exchange, the company increases shareholder base and enhances credibility. Going public improves company’s visibility and credibility among institutions and the investing public due to complying with various regulatory norms and ensuring transparency while conducting operations.
From the buyer’s perspective an individual benefits Genuity from purchasing shares under a stock exchange system. The major merit of buying shares to an investor is gaining part- ownership of the company meaning an individual gets to control and participate in the decision- making process of the organisation depending on attached rights to the purchased shares.
Another advantage of buying shares is that of receiving dividends which are a form of a return on shares bought. Dividends come in as either income or may be used to re-invest into buying more shares. In its very essence, investing in shares is about accumulating and multiplying wealth.
The most basic tip about how to invest money in the share market that traders follow is ‘buy low, sell high. Investing in shares adds diversity to the investment portfolio. The portfolio could now give investors several sources of income, from general and common real estate, stocks, interest earned from bank accounts apart from an investor’s chief source of income.
The money put into some types of investments, such as fixed deposits, cannot be accessed until the investment has matured. In contrast, buying shares allows investors to sell them at any time, without a limit. The amount resulting from this transaction may be easily transferred to their bank accounts.
The process of buying shares in the stock market is simple and easy for all investors. Buying of stocks is done with the help of a broker, financial planner, or online mode.
It takes hardly a few minutes to set up an account and start trading. An investor can also buy shares easily without going anywhere, and the profit is directly credited into their bank account.
Individuals must actively look at investing in stock markets either through buying or selling and diversifying their financial portfolio because with that they can stay ahead of inflation. The primary purpose of investments is to secure our future, but we need to check in upon inflation from time to time.
If inflation and the rate of return on investments are similar then our gains become nil. The rate of return on investments should be ideally higher than inflation. Stock markets have always stayed ahead of inflation especially in countries as India.
For instance, if inflation is around 3-4 percent, then markets have clocked in yearly gains of around 10 percent. Apart from that, you will have the freedom to choose which companies to invest in, and also it will serve as a much-needed liquidity cushion. Lastly, every investment is inherently connected with risk. Its existence and diversity among various types of investments is one of the driving forces behind the development of the capital market.
Keen Mhlanga is the executive chairman of FinKing Financial Advisory. He can be contacted on [email protected]; +263719516766.
