What are Shares?
Overview
Once you have decided that you are interested in buying shares, it is important to have a clear understanding of the act of investing and the different shares available to trade with.
By the time you have completed this module, you should be able to answer the following questing:
- What are shares?
- What basics do I need to know before I invest?
- What are types of shares that you can invest in?
What Basics Do I Need to Know Before I Invest?
You will come across some unfamiliar terms as you begin your investment journey. Below are some basic terms to familiarize yourself with as you get started:
- Dividends
- Returns
- Shares/Equities
- Supply & Demand
What are Shares?
A share is simply proof of ownership of part of a company. The more shares you have, the more of the company you own, and you become known as a shareholder. This proof of ownership is represented by a share certificate, which today, is recorded electronically.
As a shareholder, it means that you have access to your share of the company’s earnings and any voting rights attached to the shares. It is important to note that being a shareholder does not necessarily mean you have a say in the day-to-day running of the business or that you can take items from the company where you hold shares (e.g. free clothing from Woolworths).
Companies sell shares so that they can raise the money needed to grow and expand their business, and to carry out certain projects to generate more income. These companies can sell shares either publicly or privately, and you can buy different types of shares.
Types of Shares to Invest In
Ordinary Shares
These are shares that a business issues (sells) so as to raise capital (funds) for the business.
Benefits/Positives: Owners of ordinary shares essentially own the business as they are able to vote and manage the company. They have a share in the performance of the company. These shares can get you higher capital returns compared to bonds.
Risks/Negatives: The future capital value of ordinary shares is not guaranteed so these shares carry a higher risk than bonds.
Types of Shares to Invest In
Preference Shares
These shares are considered to be a combination of debt and equity because they pay a fixed dividend (like how you pay interest on debt), yet they can also give the shareholder capital growth potential (just as ordinary shares do). They are considered to be somewhere between bonds and ordinary shares.
Benefits/Positives: Preference shares can also get you higher capital returns (return on the money you invest) compared to bonds.
Risks/Negatives: These shares do not give shareholders any voting rights (much like debt).
Exchange Traded Funds
An ETF is simply an acronym for Exchange Traded Funds. These funds aim to mimic the performance of a certain index. Therefore, it becomes easier and cheaper to have an investment portfolio that mimics the performance of a particular share index.
Rather than buying shares of all the companies that make up an index, an investor can simply buy the ETF that copies the performance of the index. Before ETF’s were available investors who were looking to create an investment portfolio that behaved very similarly to the FTSE/JSE All Share index had to buy over 150 shares.
Therefore, ETF’s are considered to be well diversified investment products and are great for first time investors looking for low risk portfolios that require little management. Holding a portfolio that mimics the behaviour of a market index no longer requires an active strategy burdened with the fees of regular buying and selling of shares. ETF’s may also provide income in the form of dividends if any of the underlying companies do declare one, however this is not true for all ETF’s.
An example of an ETF is the Satrix 40 which aims to accurately replicate the FTSE/JSE Top 40 index, by holding the exact weighting and number of shares that constitute JSE top 40 index. Investors who buy ETF’s may also receive dividends, some paying on a quarterly basis. Therefore, investors can earn capital gains and dividend rewards. The greatest advantage of buying an ETF such as the SATRIX 40 is that just one share or ETF unit represents the Top 40 shares.
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