A share is an instrument (security) representing a shareholder’s rights in a company. A share is an equal portion in the capital of the company. It represents ownership interest in a firm.
Investing in common shares involves all the advantages and disadvantages of the ownership in a firm and is a reasonably riskier investment compared to investing in bonds. Dividend payments and an increase in the value of the share are both possible but not guarantee.
Return
The yield on investments in shares is composed of dividend payments as well as price gains or losses and cannot be predicted with certainty.
The dividend is the amount of a company’s earnings distributed to shareholders. The amount of the dividend is decided by the shareholders’ meeting and is expressed either as an absolute amount per share or as a percentage of the nominal value of the share. The return achieved on the dividend in relation to the share price is called dividend yield.
Another part of the return on investments in shares is achieved from their performance/price increase.
Types of shares
A firm can have different types of shares, with different conditions and rights. Some of the types of shares are the following:
- Ordinary shares: are standard shares without any special rights. Represents equity ownership in a company and entitles the owner to a vote in matters put before shareholders in proportion to their percentage ownership in the company. They have the potential to give the highest financial gains, but also have the highest risk, especially in the event of bankruptcy or insufficient profits to distribute a dividend. The holders of ordinary shares are entitled to a dividend, if any are available, only after the preference dividends have been paid. They are also entitled to their share of the residual economic value of the company should the business unwind, after bondholders and preferred shareholders. Ordinary shareholders are considered unsecured creditors.
- Preference shares: Carry some preferential rights over other classes of shares. Usually they refer to the right to dividends and the right on winding up to receive priority repayment. A preferential dividend is a cumulative dividend. Preference shares do not carry the right to participate in any surplus profits of the company.
- Cumulative preference shares: the holder has the right, if the dividend cannot be paid in one year, to have it carried to successive years.
- Redeemable shares: come with an agreement according to which the firm can buy the shares back at some future time.
Risks
The biggest risks on shares are the market risk or systematic risk, which cannot be diversified away, and the unsystematic risk which can be reduced or eliminated by constructing a well diversified portfolio. Furthermore dealing in shares may involve risks including but not limited to the following: credit risk, country risk, liquidity risk, exchange risk, and interest-rate risk (indirect).
