The form of return that can be expected through a stock investment would largely depend on the company. Essentially the return of an investment of this nature would be either through capital gains or through a dividend payment made by the company.
Shares for capital growth
Capital growth would refer to the increase in the value of an asset over a period of time. An investor who would chose to invest in shares would do so to witness an increase in the price which would translate into a profit once sold. However, an investor should also bear in mind that he/she could also suffer a capital loss should the share price drop after investing.
Studies have revealed that over the long term a share investment has proven to draw a greater return for its investor in comparison to most other forms of savings or investments. Owning a share with the potential for a rise in its value will grow the value of your portfolio.
Shares for dividends
A dividend is a form of payment made to the shareholders of a company, usually as a distribution of its profits. A profitable company could re-invest a portion of the profits back into the business and the remainder could be distributed to shareholders based on the company’s profit distribution policy. Certain mature companies over a period of time have been identified as stable dividend paying companies which would again depend on its policy on dividend payment.
Shares for liquidity and flexibility
Certain forms of investment would be deemed as illiquid which means they cannot be immediately sold and converted into cash. Shares give an investor a considerable amount of financial control because of its flexibility and liquidity. In particular, ordinary shares are considered to be one of the most liquid forms of investments. Unlike assets such as property, shares can be easily purchased and sold through the market and is not subject to significant transaction costs. An investor is given up to three market days to settle the outstanding amount following a purchase of shares made through the market.
Right to vote
A shareholder is entitled to participate and vote at Annual General Meetings (AGM) and at Extraordinary General Meetings (EGM) of the company, allowing the shareholder to influence important corporate decisions made.
In this regard, an investor should also note that voting rights are given as per specifications made in the articles of association and the companies act.
Rights issues
A company has the ability to raise additional capital through the market to satisfy a requirement through the form of a rights issue. A rights issue is an issue of rights to a company’s existing shareholders that entitles them to buy additional shares directly from the company in proportion to their existing holding, within a fixed time period.
The price at which these shares could be purchased at, in theory is at a discounted rate in comparison to the prevailing market price.
During an issue, an investor could exhaust one of three options. An investor could either renounce the rights into the CDS which would enable him/her to sell the rights (reference price is decided by CSE), An investor could reject the rights or an investor could choose to accept the rights which would enable him/her to purchase the shares within a specified time period.
The ratio at which the number of shares are to be allocated would depend on the amount intended to be raised through the rights issue. Once the capital amount required is decided, the company would decide on the ratio. For example, a rights ratio of one for two means a shareholder can subscribe to one new share for every two shares already held.
An investor owning 100 shares prior to the rights issue gets the right to subscribe for 50 new shares or any of the three options available to the shareholder as mentioned above.
Removal of adverse effects of inflation
Shares are a good investment in an inflationary environment, since share prices adjust to protect investors from the effects of inflation.
Possibility of using shares as collateral
An investor is given the ability to use his/ her stock holding as collateral in order to secure a loan from a financial institution.
Capitalisation of Reserves/Bonus Share issues
Companies convert retained earnings (which represent the profits held in the business over time) to capital by issuing new shares to existing shareholders. The shareholders do not have to pay a consideration for these shares and could be categorised as a benefit to the shareholders. For example, a capitalisation of reserve of 1 for 5 means that each shareholder receives 1 new share for every 5 shares held. An investor, who owns 100 shares before the capitalisation of reserves, receives 20 additional shares free of charge. - CSE
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Stock market quiz
Answer the two questions given below and stand a chance to win CSE merchandise.
1. Name the security that gives its holder the right to purchase a share on a future date at a predetermined price?
2. Name a method through which a listed company can raise additional capital from the market?
Mail your answers to [email protected]