Advantages Of Investing In Ordinary Shares Of A Company

 

The following are the advantages of investing in the ordinary shares of a company:

  • Voting Right
  • Dividends
  • Bonus Shares
  • Rights Or Scripts Shares
  • Benefit Of Limited Liability
  • Capital Gains
  • Easy To Buy And Sell
  • Longer Term Benefits

In general you can invest your money in any business. You can also invest your money locally, nationally or internationally.

However, in this article attention is focused on the advantages of investing in ordinary shares of a company. The disadvantages of investing in in ordinary shares of a company is a topic for another article.

Advantages: Voting Rights

One of the important advantages of investing in the shares of a company listed on the stock exchange is that you automatically become one of the owners of the company. It does not matter the number of shares you hold.

In the same vein, during the company’s Annual General Meetings, where directors are appointed, your share in the ownership of the company entitles you to vote and be voted for.

Another advantage of investing in the shares in the ordinary shares of a company is that, through your votes, you might have a voice in the internal running of the company. This is possible especially if you are one of the major shareholders with controlling interests.

In other words, how much you are able to influence the internal running of the company should depend on the number of shares you hold.

Advantages: Bonus Dividends

Yet another advantage of investing in the ordinary shares of a company listed on the Stock Exchange is that you will receive dividends two times in a year; interim and final dividends.

The amount of dividends you receive is usually based on the number of ordinary shares you hold. In other words, the more shares you hold the more dividends you should receive.

Advantages: Capital Growth

Still another advantage of investing in the ordinary shares of a company is that it can help your money to grow. For instance, when the company declares dividends and you are paid, you have two options:

  • You can use the dividend to buy more shares; thereby increasing the number of ordinary shares you hold.
  • Or use your cash to meet your needs.

Advantages: Bonus Shares

Another advantage of investing your idle cash in the shares of a company that has large balance on its Share Premium Account, the company may give you bonus shares.

Furthermore, bonus shares increase the number of ordinary shares you hold. Most importantly, another advantage to you is that bonus shares also rank for dividends at the end of the year.

Advantages: Rights/Script Shares

An advantage of investing in the ordinary shares of a company is that should the company need more funds to expand its activities, it might issue rights or script issues to their existing shareholders.

When this happens you will need to pay for the additional ordinary shares allotted to you. Companies do this if they do not want to issue shares to the general public or borrow from financial institutions.

Rights shares benefits you in two ways:

  • It increases the number of ordinary shares you hold
  • And rights shares also rank for dividends at the end of the year.

Advantage Of limited liability

When the company goes down, your losses should be limited to your investment in the company. In other words, the company will not require you to bring in more money to pay off the debt it owes.

Advantage Of Capital Gains

The prices of ordinary shares rise and fall on daily basis. However, another advantage of investing in ordinary shares in a company is that you can make capital gains.

Capital gains occur when you sell your ordinary shares above the price at which you bought the ordinary shares. If you are trading on shares, this is cool for you.

Advantages: Ease Of Purchase And Sale Of Shares

An important benefit of investing in ordinary shares of a company is that you can easily buy and sell your ordinary shares through a stock broker.

Therefore, in either case you are only required to give your stock broker instructions to buy or to sell your ordinary for you.

Long Term Benefits Of Investing In Ordinary Shares

An overall advantage of investing in ordinary shares of a company is that, in the long term, ordinary shares perform better than bonds, mutual funds and similar securities.

Therefore, you could start investing in ordinary shares with little amount and continue to add to your investments on regular basis over a long period of time, say 5 years and above.

Related: How To Manage Small Business Finances Efficiently

In other words, you should only invest money you do not intend to use any time soon. By continually buying more shares even on monthly basis and reinvesting your dividends, you should certainly see your money growing.

Bottom Line

The following tips should help to get started:

  • Start investing with a little amount of money
  • Invest only the money you can afford to lockup for 5 years and above
  • Do not invest your cash in the ordinary shares of one company.
  • Invest in the shares of companies in different sectors so that you can be protected against total loss of your investments.
  • Invest in companies that pay dividends on regular basis.
  • The longer the period of time you allow your investment in ordinary to remain invested, the more your money should grow.
  • Before you invest in ordinary shares of a company, you should look at the track records of the company for the last 5 years.

Bonus: For now Zenith Bank Plc and Guarantee Trust Bank Plc are two banks you can put your money. They have track records of dividend payments. They are strong and stable.

However. if you are not experienced in investments before, it is recommended that you seek help from a stock broker. A stock broker knows when to buy or sell. He also knows the best stocks to buy for you. However, you should not take anything for granted.

 

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