What are shares? What is a Stock Exchange?
A share is simply a part-ownership of a company. If, for example, a company has issued a million shares, and you own 10,000 shares in it, then you own 1% of the company. As a part-owner of a company, you are investing in the management of the company. You should invest in companies you feel confident are well run.
At its most basic, the stock exchange is a market which brings together people who want to buy shares in a company, and those who want to sell their shares. The laws of supply and demand determine the prices buyers and sellers settle on. The companies whose shares can be bought and sold on the stock exchange are referred to as listed companies.
What are the reasons for investing in shares?
Capital Growth: Over the long term, shares can produce significant capital gains through increases in share prices.
Some companies can also issue bonus shares to their shareholders by way of a bonus issue as another way of passing on company profits or increases in their net worth. A bonus issue occurs when money from a company’s reserves is converted into issued capital, which is then distributed to shareholders in place of a cash dividend. A bonus issue does not change the value of your investment.
Many listed companies also make what are called rights issue, where they provide opportunities to their existing shareholders to buy more shares in the company at a discounted rate and without the need to buy through investment firms, thereby saving on fees. Companies do this as a way of raising more capital for expansion, and it provides you with an opportunity to increase your holding in the company at a discounted price if you are confident of its potential.
Dividends: Companies may pay a portion of their profits to their shareholders in the form of dividends. The amount of dividends to be paid to existing shareholders is usually determined and approved at the company’s Annual General Meeting. The amount of profit which is not distributed is ploughed back into the company in the form of reserves. Such accumulation of reserves is then used by the company for future projects.
Buying and Selling: Compared to other investments (such as property), shares can be bought or sold quickly through an investment firm. You can, if you so wish, sell part of your holdings in any shares.
Diversifying: As part of your investment strategy, you may have part of your money invested in shares. You may buy shares directly on the stock market or units in collective investment schemes which invest in shares.
Are shares a risky investment?
As with all other investments, prices of shares can go up as well as down. Sometimes, share prices can change substantially as a result of reaction to some news which may affect the listed company. Whenever there is news about a listed company which shows, for example, improvement in its profits, investors tend to react positively by purchasing more shares into the company. As the demand for the shares increase, so too will the price because people would be less willing to sell their holdings in the shares. This is referred to as the law of supply and demand; when demand increases, prices increases. On the other hand, price will start to fall sharply when investors, reacting to negative news about the company, dispose of their holdings as quickly as possible to minimise any dramatic downfall in value of their shares.
There are instances where share prices can fall dramatically. Don’t get into a panic, think carefully before selling your shares quickly at a loss. In fact, do not buy or sell on the basis of a change in price only. Your decision to buy or sell should also be based on your analysis of the annual report, changes in management, news about the company etc.
A company is not obliged to pay periodic dividends, even if it has made profits. Hence, you may find that although in one year a company has paid out dividends to its shareholders, the following year that same company may choose, for a number of reasons, not to share part of its profits with its shareholders. Therefore, shares are not suitable if you want a periodic (such as annual) payment of interest. Shares are perhaps more suitable for those seeking capital growth and are prepared to take some risk.
Are all your eggs in one basket? Ask yourself: is this your only investment or your biggest investment (except for your home)? If all your money is going into purchasing shares only or in units of collective investment schemes which invest in shares, you will be taking a really big risk compared with someone who has a variety of other safer products.
What is the best way to obtain information about a company?
You may rely on the advice provided by your investment firm and do your own research when deciding which companies to invest in. The following points provide you with some suggestions regarding sources of information available to the investing public.
Read and listen to the media: This includes newspapers, radio, television and Internet sites. If the company is listed on a Stock Exchange (such as the Malta Stock Exchange) you can look at its share price to obtain an indication of the current value of the share for the company.
Read the company’s annual report: If a company is listed on a Stock Exchange, look at its most recent annual report to see what it has been doing for the past few years and whether it has delivered on its promises. Usually the company will give you these for free or you can get them from your investment firm. The reports will include financial statements, details of the company’s operations over the past year, what the company does, and details of directors and major shareholders of the company. The company’s balance sheet shows what the company owns and what it owes, and its profit and loss statement shows what the company has earned during the year and how these earnings have been distributed.
Look at company announcements: From time to time, listed companies make announcements about major issues related to their operations. For example, an announcement by a listed company could be made when half- and full-year accounts are made public. You can also speak to your investment firm who should be monitoring such announcements.
Read reports by stockbroking firms and investment firms: Many investment firms carry out analysis of various listed companies and such information would be available on their website.
Visit the company’s web site: Many listed companies have their own website which holds large amounts of information about the company’s activities and other valuations including share price, levels of sales, dividend levels, etc. You can also contact the company secretary or someone in the public relations office to send you information about the company.
What is an Initial Public Offering?
An initial public offering (sometimes referred to as IPO or “flotation”) occurs when a company offers its shares to the public for the first time to raise capital. For this purpose, the company issues a prospectus, which is a document that will help you decide whether the company is a suitable investment for you.
A prospectus is required by law to contain all the information you and your investment firm would need so as to make an informed investment decision about the company. It must clearly disclose any risks associated with the investment.
You should not only be interested in what the prospectus says but also think about the matters that it is silent on. Understand the assumptions in the forecasts: Many companies make profit forecasts in their prospectuses which are not met. So you need to read the prospectus critically and decide whether the assumptions made in the prospectus are reasonable. The company should disclose what assumptions were made in preparing those forecasts.
What is the best way to keep track of my shares?
One of the best ways to protect your share investments is to be an involved shareholder in your company. You should be interested in what happens in the company and exercise your powers as a voting shareholder. Keep an eye on your investment because circumstances may change and the market value of your investments will certainly change.
Statements: Listed companies on the Malta Stock Exchange use an electronic transfer and settlement system called CSD (Central Securities Depository). The CSD issues holding statements to shareholders on behalf of listed companies.
You will receive a CSD statement whenever you buy or sell shares in a company. Always keep your CSD statement as proof of your transactions and to help keep track of your shares.
Material sent to you by the company: You will usually receive regular information from the company (e.g. annual report, at least once a year). Read whatever material is sent to you by the company. If the information is late, check with the company.
Receipts and paperwork: Always request receipts from your investment firm and keep all the paperwork about your investments in a safe place, not at your investment firm’s office.
