When you buy stocks or ordinary shares, you own part of the company and have the right to vote at general meetings. Each share is a small stake in a company and you can buy small or large number of lots depending on the amount of money you have.
As a shareholder, you can benefit from the profits earned by the company
in the form of dividends paid to you, and also from the growth in the value of the company.
But why do companies issue shares? The company benefits by raising funds to operate and expand its business without having to borrow the money from other sources such as banks.
You should be aware that there are risks associated with buying shares. When the company performs poorly, its shares may fall in value and you may not receive any dividend. There are other factors such as the performance of the stock market as a whole and the country's economic situation that may affect the price of your shares. It is also possible that you may lose your entire investment if the company goes out of business. There are also shares that are difficult to sell if the demand for them is lacking. It is therefore important that you select the right companies to invest in.
Financial advisers will generally recommend shares as part of an investment portfolio. The aim in trading shares is of course to buy at a low and sell at a high price. For long-term investors, it is important to select shares based on fundamentals, which means investors need to be knowledgeable about the companies in which they plan to invest their savings. It is therefore important that you read and understand the prospectuses, financial reports and corporate announcements, which listed companies are required to issue to the shareholders and the investing public.
In selecting shares, you should examine factors such as the background of the company and its management, its financial strength, price-earning ratio and dividend yield, its earning growth prospect and competitive edge. A wise investor checks out these factors which may affect the price of a stock before putting in his money.
There are also two other types of share issues an investor will come across in trading shares, and they are bonus and rights issues. A bonus issue is the issue of new ordinary shares at no cost to existing shareholders but out of the company's reserves and in direct proportion to their existing shareholding in the company. Bonus issues are used to enlarge the capital base of the company and may also be used as a means of rewarding its existing shareholders. To be entitled to the bonus share, take note of the Ex-Date as only shares bought before the Ex-Date will be entitled to the bonus share.
The period from the day of announcement of the entitlement of bonus or rights issue or dividend to the day before the Ex-Date is commonly referred to as the cum-period. Normally, Cum is a prefix meaning "with." A share that is cum-dividend means the buyer is entitled to a dividend currently attached to it. The same is true for cum-rights and cum-bonus.
A rights issue gives the existing shareholders the right to subscribe for new ordinary shares at an issue price lower than the prevailing market price and at a ratio equivalent to their existing shareholding. Companies carry out a rights issue when they want to raise additional funds to finance their capital requirements.
In offering a rights issue, the company sends out a provisional allotment letter (PAL) to all existing shareholders informing them of the rights issue entitlement. Shareholders are required to follow all the instructions given in the PAL in subscribing their rights for the new shares. If you choose not to exercise your right, remember that the PAL can be sold to the open market (if quoted) or the entitlement can be renounced to someone else.
Often, you will see a category of 'A' Shares listed in the newspapers and investment magazines. The listing of 'A' shares refer to the issue of shares not qualified to entitlements, such as dividends, bonus and rights issues. These shares will later merge with the existing shares after the entitlement date.
