The following are the 10 greatest benefits of investing in ordinary shares of profitable companies:
- Voting Right
- Bonus Shares
- Rights Shares
- Benefit Of Limited Liability
- Capital Gains
- Easy To Buy And Sell
- Longer Term Benefits
- Your take away
If you have idle cash which you don’t want to use any time soon, you can invest it in ordinary shares of a company.
You can invest your idle cash in any company within or outside the country.
However, this article is focusing on the benefits of investing in ordinary shares of a company whose shares are traded in the stock exchange.
And some of the most important advantages are as follows:
Investing in ordinary shares: Voting Rights
One of the important benefits of investing in the ordinary shares of a company is that you automatically become one of the owners of the company.
It does not matter the number of shares you hold.
What matters is that you have a share in the capital of the company.
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.
Thus, through your vote, you have a voice in the internal running of the company.
However, how much you are able to influence the internal running of the company will depend on whether you are a major shareholder.
Investing in ordinary shares: Dividends
Another benefit of investing in the ordinary shares of a company is that you can receive dividends two times in a year; interim and final dividends.
However, you should note that you will only receive dividends if the company makes profits.
The amount of dividends you will receive is usually based on the number of ordinary shares you hold.
The best part is that dividends are not subject to tax because withholding tax has already been deducted.
Therefore, the more ordinary shares you hold the more dividends you will receive.
Investing in ordinary shares: Capital Growth
Investing in the ordinary shares of a profitable company can make your money to grow.
For example, if the company declares dividends, you can use it to buy more shares.
Alternatively, you can can fill e-dividend form authorizing the dividends to your bank account.
The reinvestment option will increase the number of ordinary shares you hold.
Plus, these additional share will also rank for dividends at the end of the year.
Therefore, if you continue to reinvest your dividends regularly, your capital will continue to grow.
Another benefit of investing in ordinary shares of a company is that the company can issue bonus share certificate to existing shareholders.
They are called bonus shares because you do not need to pay for them.
Furthermore, bonus shares will be added to the number of ordinary shares you already hold.
Thus, the effect of bonus shares is to increase the number of shares you hold in the company.
Most importantly, bonus shares also rank for dividends payments every six months.
Investing in Ordinary shares: Rights Shares
An advantage of investing in the ordinary shares of a company is that the company can make rights issue of shares to existing shareholders.
Usually rights issues are made by companies to raise additional capital from its existing shareholders.
A company can issue rights shares if it does not want to borrow money from bank.
However, unlike bonus shares, you will need to pay for rights shares. They are not free.
When you eventually buy right shares, they will be added to the shares you already hold.
Consequently, the number of shares you hold in the company will increase.
Furthermore, the right shares also rank for dividends payments two times in a year.
Another benefit is that if the company is facing liquidation, your loss will not be more than the money you invested in the shares of the company.
In other words, the company will not ask you to bring in more money to pay off the debts it owes.
The prices of ordinary shares of companies rise and fall on daily basis.
However, you can make capital gains if you sell your shares above the prices you paid for them.
For example, if you bought at N100 and sell at N120, you will make a capital gain of N20.
Note that capital gains are subject to taxation.
Ordinary shares: Ease of Purchase and Sale
An important benefit of investing in ordinary shares is that ordinary shares are easy to buy or sell.
Therefore, if you want to buy or sell your ordinary shares, you are only required to give a stock broker order to buy or sell your shares for you.
Stock brokers know the best times to buy or sell.
They do collect small commission for helping you to buy or sell.
Long Term Benefits
The long term benefits of investing in ordinary shares is that they perform better than bonds, mutual funds and other securities.
Thereafter, when you buy ordinary shares, you should allow the investment remain invested for a long time.
Your Take Away
The following tips can help to get you started:
- You can start investing with as little as little as N10,000
- Invest only the money you can afford to lockup for 5 years and above
- Invest in the shares of companies in different sectors to spread your risks.
- 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 5-year financial statement of the company.
- This will enable you to know the dividends history of the most company.
Bonus: For now Zenith Bank Plc and Guarantee Trust Bank Plc are two banks you can put your money.
They have track records of consistent dividend payments. They are strong and stable.
However. if you are not experienced in investments before, you are free to seek help from a stock broker.
A stock broker knows the best stocks to buy. Furthermore, he knows when to sell.
By Samuel Ijenhi
B. Sc Accounting, University of Benin
Benin City, Nigeria.