WHAT ARE SHARES

Shares (stocks) represent ownership in a company. When you buy shares you become a part owner (shareholder) of a company. Public companies have hundreds or thousands of owners. Each owner contributes a little towards the capital of the company. This contribution is represented by shares. As the owners of a company, the shareholders are entitled to dividends, and are also entitled to vote at the Annual General Meeting (AGM) of the company.


There are two main kinds of shares: ordinary shares (common stock), and preferential
shares. Preferential shares are usually owned by the founders of the company. We are
mainly interested in ordinary shares as this is the kind traded on the stock exchange. Ordinary shareholders are the risk-takers of the business. They share in the profits and losses of the business. If a company fails and goes bankrupt (folds up), its assets are sold (i.e. the company is liquidated) and the proceeds are used to pay its creditors and suppliers. The money is also used to pay its bondholders. If any money is left, the shareholders are paid last –the preferential shareholders, before the ordinary shareholders. If nothing is left, the Shareholders go empty handed. Thus they bear the risk of the business.



Ordinary shares usually have a par value and a market price. You might come across
the phrase “A 50k share sells for N3.00”. That means the share actually sells in the stock market for N3.00 – the market price. The 50k figure is the share’s par value, which means that the company’s shares are in units of 50k. This figure is of no practical relevance to us. It is used by accountants to balance the company’s books. Common stocks in American companies have no par value.


There are three ways investors make money in shares – dividends, capital
appreciation and bonus shares.



1. Dividends are paid in proportion to the number of shares a shareholder owns in
a company i.e. the more shares you own the more you will receive. For example
when a company declares a dividend of 35k, it means that a shareholder who
owns 10,000 shares in the company will get N3,500 as dividend payment. Most
companies pay a final dividend at the end of their financial year. In addition to
this, some companies also pay an interim divided around the middle of their
financial year. It is not compulsory for a company to pay its shareholders a
dividend. If the company made a loss for that year, it may decide to forgo paying
its shareholders any dividend.



2. Capital appreciation refers to the rise in the price of a share. If you buy a share at
N3 and it rises to N 6, your investment has doubled in value.


3. When a company makes profit, it does not pay it all out as dividend. It may
reinvest part of the profit. This increases the value of the company. After some
years, to reward shareholders, the company can create new shares to represent
this added value, and give these shares as a bonus or scrip issue to the
shareholders. Shareholders can retain these new shares or sell them, converting
them to cash. For example, a company can give its shareholders ‘One new share
for every Two held’ on a certain date. That means that the total number of shares
the shareholder owns in the company on the specified date will be increased by 50%.


Shares are securities. A security is a legal document that shows you own a particular investment. Securities can be traded in the financial markets. Other common types of securities are bonds, Certificates of Deposit (CD), Treasury Bills etc



Bonds

A bond is a legal document that shows someone owes you money with interest. It is
an IOU note. When you buy a bond you are loaning the seller money at a specified
interest rate. (Interest is the cost of borrowing money). The interest or coupon will be paid you yearly (or as stated) and finally the amount loaned, the principal or face value, will be repaid you (redeemed) at a specified date – the maturity date.


Governments, companies and public institutions can sell bonds. Generally bonds are
less risky than shares, but they give lower rates of return. There are different types of bonds – debentures, convertible bonds, floating rate, zero-coupon etc. The most secure bonds are the Federal Government Bonds. They are termed gilts. Your
stockbroker can help you buy bonds when they are on offer.



Certificate of Deposit

A Certificate of Deposit (CD) is a document that shows you have deposited money in
the bank for a period of time at a specified interest rate. CD’s are sold by banks, and attract a high interest rate. These rates range between 13-17%.CD’s are low risk
investments and are thus very secure, but their rates of return are lower than that of the stock market. They are issued (sold) by banks. If you own a CD and wish to get your money back before the maturity date, you can sell it at a discount. It is a liquid investment (easily convertible to cash).



Treasury Bills

Treasury bills are securities sold by the government. Treasury bills are sold at a
discount, and have their full value paid at maturity. For example, a N10,000 treasury bill can be bought at N9,300 and redeemed for its full value after a specified time, usually 90 days. Treasury bills are auctioned by the Central Bank. You can buy treasury bills from your local bank. Treasury bills are one of the most secure investments. Treasury bills and CD’s are called money market instruments.

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