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Greetings to you for making time to pass by and have a look at what we have in store today. In case you were not here yesterday, we are looking at investments in shares and this is the second in the series of the share investment articles. ( read the introductory article here). By the end of these series, I hope you will be in a better position to decide whether to invest in shares or not.

What are shares really? Share are a unit of account that gives the holder ( know as the shareholder) a right or a portion of ownership in a company. Let  us take it as an illustration.

You and your friends are out for dinner. You would like to have pizza but do not have enough money  individually so you put together money to buy the pizza. For argument sake, the pizza cost $ 100. You are 5, each contributing 15 but one of you has decide she will contribute $40 because she would like 2 slices of pizza.

Assuming that the pizza has six slices, you all get 1 piece each, except X who contributed more to get two pizza slices. In % terms,  you all own 15% of the shares in the pizza and your friend who contributed more gets to get 40%.

There are different types of shares that a company can issue but the common ones are ordinary shares as well as preference shares. The difference between this two are the rights attached to each shares. The holder of preference shares as the name suggest has the preferential treatment over  ordinary shares.

Back to the pizza example, assume that you guys  decide that the ones that pay $15 will only get a piece each if there are enough pieces after the your friend who paid $40 has taken her two slices. In that case your N$40 friend has preferential treatment and in an event that there are no enough slices in the box, she still get her two slices. This will then make her a preference shareholder. The rest of you guys only get what is left after the N$40 friend has taken her slices so you will end up sharing whatever is left. In an event that the pizza only has two slices, you do not get anything. This will make you are guys ordinary shareholders.

In the standard bank share offer that is currently open, they are issuing ordinary shares. As there were already other ordinary shares in issue, you will have the same rights with the existing shareholders.

Now that you understand what shares are and the difference between the different share types, you need to understand what makes shares different from debt or other form of investments.

One of the reason why company issues shares instead of taking out a loan is because shares are not paid back. Meaning, when you buy standard bank’s shares, do not expect standard bank to pay your money back.  You can get paid a dividend when they decide that there is enough money to pay out divends. But should you not want the shares anymore, you will only be able to sell it to someone who is willing to buy it.

Unlike shares, when you invest in a bank for example, you can expect your money back upon the maturity of your investment and additional interest. E,g if you had to put your money in a 32 day account, you will get your money after giving notice and whatever interest that it has accrued ( gained) in the period of your investment.

In short, shares are an indefinite investment you make. The return you make on shares is called dividends and dividends are paid at the discretion of the company. The company has no obligation to pay dividend if there is no enough funds or they would like to keep the profit made to re-invest in the business.

However, in an event they declare dividends, you will get cash as well as when the business grow, the share price will increase. Eventually when you decide you no longer want to have the shares, you can sell them to people looking to buy the shares and if the price that you sell it for is higher than what you paid for , you will make the profit.

Next up, we will cover how dividends are paid, and other key features that I saw in the prospectus worth noting.

Love

Dhalondoka

 

3 thoughts on “What are shares?

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