What You Stand To Gain For Investing In Shares
Equity space from time past had been a better profit returning sector if compared to the performance of the fixed income space, sector players tend to put a larger portion of their investment in equities than other asset classes like bond, commodities, real estate and consumer goods. This article will expose the inherent benefits that await you for investing in shares as well as enlighten you on the possible pitfalls you must avoid as avid investor.
To begin with, you will be better off if you understand the basic definitions in stocks investment:
A share can be defined as a unit of ownership that represents an equal proportion of a company’s capital, this is a representation of the portion or part of a company that you as an investor owns. When you buy a share, you are referred to as a shareholder because the payment of dividends affords you a small percentage of everything that the company owns, for example, buildings, equipment, computers and other assets.
As a shareholder of a company, you have the right to make decisions that can influence the company as you also have equal claim on the company’s profit and equal obligation for the debts and losses of the company.
There are two(2) types of stocks, the ordinary shares and the preference shares. Ordinary shares are those traded privately as well as those traded on the various stock exchanges around the world. You should know that the true value of an ordinary share is based on the price obtained through market forces, the value of the underlying business and investor sentiment toward the company. Investors always have a voting right and also bear the liability of the company in the event of a winding up.
Preference shares are shares that afford the investor a higher claim on the assets and earnings than ordinary shares, with reference shares you receive dividend that must be paid out before dividends are paid out to ordinary shareholders though the shares usually do not have voting rights. You can purchase preference shares in the primary market, public offers and the secondary market and these are usually brokered by stockbroking firms who in turn earn commission on the trades executed on your behalf.
What you stand to gain for investing in shares are simplified below for easy understanding of the dynamics of stock investing:
1. Capital Appreciation:
On a good day, one of the gains of investing in shares is capital appreciation, capital appreciation is the amount of increase found in the principal value or the price per unit of a share. This is also a rise in the value of an asset based on a rise in market price. In essence, the capital you invested in the security has increased in value and the capital appreciation portion of the investment includes all of the market value exceeding the original investment or cost basis. You should note that capital appreciation is one of the two main sources of investment returns, with the other being interest income or dividend.
This is a portion of a company’s earnings, decided by the board of directors and approved at the company’s annual general meeting to a class of shareholders like you. This dividend is most often quoted in terms of the amount each share receives(dividends per share) or it can be quoted in terms of a percentage of the current market price, referred to as dividend yield. It should be noted that dividends may be in the form of cash, stock or property as most secure and stable companies offer dividend to shareholders but high-growth companies rarely offer dividends because they apply all of their profits for re-investment to help sustain higher-than-average growth.
Share prices might not move much, but the dividend pay-out attempt to make up for the slow movement.
3. Owning Quality Companies:
Owning shares in quality companies make you to get the privilege where the board of directors effectively work for you and ensure you get good returns thereby maximizing your wealth. The fiduciary responsibility of the board of directors are usually tailored in a way that will always benefit you as shares have the potential to generate good returns. Please note that shares can also be risky so you should have a long-term investment plan at the back of your mind as you should be looking at 3-5 year time frame to maximize your investment.
4. Attractive Returns:
Historically, shares have had better returns compared to other investments, such as cash in the bank and bonds. You should bear in mind that past performance of a stock is not a guarantee that the stock will perform in the future as there are many determinants of stock price movement. Saving in a bank do not also provide good returns when you factor in inflation, for example, you may be happy if a bank offers you 12% interest per annum on your term placement, but if you factor in inflation around 8.6% (depending on your region or country), then your investment is only growing at a mere 3.4% per annum. To have a growing investment, you definitely need capital growth, translating to share price increases beyond inflation which is the general increase in the cost of things you buy daily.
5. Ease Of Diversification:
Stock investment is flexible as it affords you the opportunity of ease of diversification. You are said to diversify when you explore many investment options by not concentrating on one particular company or stock, if you make smaller investment in various different companies, the probability that one of your investments fails means that it would not have a great effect on your total investment thereby shielding you from any possible downturns since you can buy small number of different shares.
Quoted stocks are usually liquid in nature and this makes them very attractive as investment option. Shares have a large market, for example, the blue chip companies, hence you can have buyers and sellers to fulfil your request especially when you want to liquidate your portfolio as against where you want to sell property, where you may have only one or two interested buyers.
7. Free Flow Of Information:
Most financial websites, newspaper and news on TV are the major sources of information about a particular company’s share as you can get to know up to the minute value of their share portfolio. To get you updated on your investments, the listing rules around the major stock exchanges in the world require that companies must report information to shareholders including financials(full year and half year) news that may affect the share price, such as acquisitions and divestments and response to queries relating to large movements in share prices.
Some Pitfalls You Must Avoid While Investing In Shares
The equities market is indeed a unique space with constantly evolving dynamics, from operators to the regulators and even you as an investor; this demands a devotion to processes and practice to ensure that expectations are met. If you are desiring to play in the market space, you will do well to update your knowledge before entering the market. There are lots of benefits in stock investment though these are not without some pitfalls especially when you lack the understanding of how the stock market works and when you make the wrong choices. For your attention, these likely pitfalls are enumerated below:
* Risk Of Ownership:
There is no controversy over your right as part owner of the company you invested in but when bankruptcy is declared, you should bear in mind that you will be one of the last to persons to receive any proceeds from the liquidation of the company or more often, you do not receive any at all. Companies go into liquidation sometimes and thereby erode the investments of ordinary shareholders therefore, you must be vigilant to watch over your investment if you consider it important to you. You may also engage the services of an experienced Investment Manager.
* Fraudulent Stock Brokers:
Activities of fraudsters may not be ruled out completely in stock investing, it is however your responsibility to detect and avoid these misfits as they operate by collecting money when there is perceived information that the shares of a particular company are a good one and instead of making the transactions in your name, they will divert the money for their selfish interest. You should therefore be selective in picking your stockbroker.
* High Volatility:
You should also take note that share prices can go up or down due to one reason or the other, sometimes share prices drop so much that it may not provide you retirement income in form of dividends from stocks. As a discerning investor, you should however know what to do at times like that.
Having read this article, it is believed that you are now better equipped to decipher what you stand to gain for investing in shares and make right choices that could improve your finances at all times.