Shares: Definition, Types, and Reasons to Buy

Written by: smm

on: 17/04/2023

Investing in shares brings you considerable profit, but you want to understand that it’s a highly risky thing to do.

Shares are a type of securities entitling holders to a proportion of the profits, providing equity ownership, and giving a management role in the company.

Companies usually sell their shares to get extra funds to grow.

Shares offer even more benefits:

— The right to vote at shareholders’ meetings and thus manage the company

— The right to receive dividends, i.e., a proportion of the company’s profits (if any)

— The right to receive a part of the company’s property if liquidated.

Shares in a nutshell:

Today, shares aren’t valuable pieces of paper, as they don’t get printed at all. They exist only in electronic form and get traded on online platforms. Consequently, they’re electronic.

But all shares used to be paper, signed, and sealed. When buying shares on the stock exchange, the company issued a cheque for the amount received, and the shareholder’s name was added to special registers. Consequently, they were paper.

Main types of shares:

These are either ordinary shares or preference shares. The differences are about the two key rights: voting and receiving dividends.

1. Ordinary shares

Ordinary shares entitle holders to vote at shareholders’ meetings but don’t guarantee dividends.

2. Preference shares

Preference shares don’t entitle the holders to vote. But such shareholders receive a certain amount of dividends. They have priority over ordinary shareholders if the company goes bankrupt, and its assets get liquidated.

As a rule, the charter sets out the procedure for calculating dividends to be paid as shareholders see fit.

Holders of ordinary shares can count on dividends only if the company fulfills all of its obligations to all preference shareholders. Namely, it’ll pay an amount or percentage of the nominal value of securities.

For that reason, carefully study the company’s charter before buying any shares.

Why buy shares:

You can buy a share package to participate in the management of the company. But most often investors buy them to get income.

1. Receiving dividends

If the company made a profit at the end of the year, and the general meeting decided to distribute it to its shareholders, you’ll receive dividends. But if it didn’t, or the meeting decided not to distribute it at all, you won’t.

2. Rising share value

You buy shares and expect their price to rise in the future. When you sell them, you’ll receive income, i.e., the difference between the price at which you bought them and the price at which you sold them.

3. Low tax rates

Keep in mind that you’ll still have to pay for the services of a depository institution or registrar, a broker’s commission, and income tax when you sell shares.

Risks you can face when buying shares:

Investing is always a risk. And it’s proportional to the probable return of securities: the more you can earn, the more you risk.

1. Demand risk

This means that securities can move up or down in price. It’s dependent on the law of supply and demand only. For example, if the company has discovered a new deposit of oil, gas, gold, or palladium, its shares will likely surge. And if the company has its license suspended, its shares will plummet.

2. Liquidity risk

This means that your securities may be difficult to sell later. It may happen that no one will want to buy them at all or will do it only with a big discount, i.e., at a low price. Nonetheless, you can sell the securities of the world’s largest and most reliable companies—so-called blue chip firms— in a matter of minutes. And it’s unlikely that people will line up for the shares of a small and unknown company.

3. Bankruptcy risk

The risk is that the company may go bankrupt and shut down. In this case, your securities will depreciate sharply. But you can get a part of the company’s property after the bankruptcy procedure ends.

Assessing the company’s shares:

You want to assess shares correctly before investing.

Be sure to pay attention to the financial statements for past years, the issue of shares, the number of shareholders, price dynamics, production volumes, changes in assets and liabilities, the structure, and corporate news.

Trading shares:

Buying and selling shares is nice and easy. You want to register with one of the brokers and open a securities account to buy shares. Once you’re done, you can start trading.

Choose a company whose shares you’d like to invest i. Find information about it and its products. Study financial statements, opt for a stock market, enter the required number of shares to buy, and add an electronic signature.

Your broker will receive the order, and the shares will be available in your account after a few hours or days depending on the type of securities and exchange.