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Investing in shares......

Continued from last week

What is a share?

A share represents your ownership in a company. As a part owner you are investing in the future growth of the company.

What are the types of shares?

Ordinary Shares (N) offer

. A right to vote at the company's AGM

. An entitlement to a share of dividends declared

. If the company is liquidated, shareholders will be settled after all the creditors, depositors, debt holder dues has been settled

Non-Voting Ordinary Shares (X)

These shares have the same characteristics of Ordinary shares except the right to vote at the company's AGM.

Preference Shares (P) offer

. Limited ownership rights

. A claim on the company's earnings before payment to ordinary

Shareholders

. Entitled to priority over ordinary shares if the company liquidates

. Most preference shares have a pre-determined dividend rate which you are entitled to receive.

Warrants (W)

This is a certificate giving you the right to buy shares at a stipulated price at a future date.

Is investing in shares risky?

There is an element of risk. However, there are strategies to reduce and manage risk through the diversifying strategy.

1. Your portfolio can be a mix of equity and debt instruments.

2. In the share market (equities), you can invest in several sectors.

Thereby in an instance when one sector performs badly and another very well, you can offset your losses in one sector from the gains you made in other sector.

3. Within a sector you can invest in several companies. Thereby if one company does not do well, your entire investment returns suffer as other companies may perform well.

Benefits of investing in equity

. Capital gains

This is when a share's selling price exceeds its initial purchase price. If the selling price falls beyond the purchase price, you would make a capital loss. Capital Gains are free of tax.

. Dividends

A company may decide to payout a portion of its earnings to shareholders. But companies are not required to pay dividends.

. Rights issues

The company may extend this privilege to existing shareholders to buy shares at a specified and usually discounted price, usually in proportion to the number of shares already owned.

. Bonus issues

Existing shareholders may be issued new shares free of cost.

When the company has excess reserves, they may use part of these reserves and allocate new shares.

. Liquidity

Shares quoted on a stock market are generally liquid. Therefore, they can be sold easily and you can get your money back in a few days.

. Higher returns

In the longer term, shares have ensured a higher return to investors.

. Hedge against inflation

Shares are a good investment in an inflationary environment, since share prices increase to protect investors from the effects of inflation.

. Collateral

You may also use your shares as collateral against loan facilities to banks.

How do you buy/sell shares?

1. In the primary market from a new issue (IPO)

Shares can be purchased directly from the issuing company.

The company publishes a prospectus with information about the company, financial status, future plans and the offer.

To buy shares: Once you have read the prospectors carefully, you may fill up an application form to purchase the shares. You can lodge these shares directly into the Central Depository System (CDS) of the CSE or hold the certificate.

To sell shares: You will have to open a CDS account through a stockbroker/bank and instruct them to sell your shares in the secondary market.

2. On the secondary market through a stockbroker

This is a market in which an investor could either buy from or sell to another investor, subsequent to the original issuance in the primary market.

1. You must first find yourself a stockbroker/custodian bank and open a CDS account through that participant.

2. Once they confirm your CDS account number, you can contact your broker through:

. Phone

. Fax

. Personal visit or

. The Internet

to trade in the secondary market.

3. You must clearly instruct your broker of the

. Name of the company