8 greatest benefits of investing in ordinary shares of profitable companies include:
- Voting Right
- Bonus Shares
- Rights Shares
- Limited Liability
- Capital Gains
- Easy To Buy And Sell
- Longer Term Benefits
- Your take away
If you have idle cash which you do not intend to use any time soon, you can invest it in ordinary shares of a profitable company.
There are quite a number of companies that you can buy Ordinary Shares from.
In Nigeria, the banking sub sector of the economy is the most active sector on the Nigeria stock market.
Therefore, this article is focusing on the benefits that you can get when you invest in Ordinary Shares of blue chip companies.
However, before you decide to buy shares, you can do due diligence research on the profile of the company.
Most importantly, you can ensure that the shares you are buying are quoted and traded on the stock exchange.
This article is, therefore, focusing on the benefits you stand to get when you buy shares of best performing companies.
1. Investment in ordinary shares: Voting Rights
When you invest in the shares of a company, 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 contributed to the share capital of the company.
In the same vein, before the company’s annual general meeting you will be invited to attend.
Furthermore, in that meeting you have right to vote just as you can also be voted for.
Thus, through your vote, you can have a voice in the internal running of the company.
However, how much voice you have in influencing the internal running of the company will depend on whether or not you are a minority or majority shareholder.
2. Investment 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 be paid dividends if the company makes profits.
Furthermore, whether the company pays dividend or not will be determined by the Board of Directors of the company.
In addition, if the company declares and approve payment of dividends , your dividends will be based on the number of shares you hold.
The best part is that dividends are not subject to tax because withholding tax is usually deducted at source before you are paid.
Therefore, the more the number of ordinary shares you hold the more dividends you will receive.
3. Investment in ordinary shares: Capital appreciation
Investing in the ordinary shares of a profitable company can make your money to grow.
For example, if the company declares and pays you dividends, you can reinvest it by using the money to buy more shares.
Thus, this reinvestment option will increase the number of ordinary shares you hold.
Plus, these additional shares will also rank for dividends at the end of the year.
Therefore, if you continue to reinvest your dividends regularly, your investment in the company will continue to increase.
4. Bonus Shares
Another benefit of investing in ordinary shares is that if the company has substantial balance in its share premium account, it can
it can distribute part of the funds to existing shareholders.
This is usually done when it wants to restructure the capital of the company.
They are called bonus(free) 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.
5. Investment in Ordinary shares: Rights Shares
If the company wishes to raise more funds internally instead of borrowing from the bank, it can issue rights shares to existing shareholders.
Usually rights issues (also called script issues) are offered to existing members to raise additional funds to finance some projects or expand the scope of their business activities.
However, unlike bonus shares, you will need to pay for rights shares. They are not free.
Consequently, the number of shares you hold in the company will increase by the number of shares the company allotted to you and which you have paid for.
However, you have an option to pay for the shares or sell them to anyone who cares to buy them.
More importantly, if you eventually pay for the shares, they will also rank for dividends at the end of the year.
But if you sold them, the dividends will go the person who bought them, not you.
6. Limited liability
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. This provision in company act is fine for many investors.
The price of ordinary shares on the stock exchange rises and falls on daily basis,
Thus, the prices on the stock exchange is determined by the forces of demand and supply.
This movement of prices of shares should not give you reason to fret, if you are aiming at long-term growth of your investment.
However, if you decide to be a speculator, (that is buy when they are cheap and sell when prices rise) you can make capital gains if you sell your shares above the prices you paid for them.
For example, if you bought a share at N100 and sell at N120, you will make a capital gain of N20.
Note that capital gains are subject to capital gains tax at the rate fixed by Federal Inland Revenue Service.
Most importantly, either way, you can still make capital gains whether you buy shares for keeps or you want to buy and sell.
7. 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.
However, you should note that the shares of blue chip company (profitable companies) are easier to buy or sell.
This is because investors are always look out for companies with impressive growth rate of returns.
If you want to buy or sell your ordinary shares, you are only required to look for a qualified and registered stock broker to buy or sell your shares for you.
And a Stock broker knows the best time to buy or sell shares.
.They do collect small commission for helping you to buy or sell.
Another cheering news is that you can get the proceeds from the sale of your shares in a matter of few days.
The fees they collect for their services are fixed by Securities and Exchange Commission.
8. Long Term Benefits
The long term benefits of investing in ordinary shares is that they perform better than bonds, mutual funds, money market funds and ethical funds.
Thereafter, when you buy ordinary shares, you should allow the investment to remain invested for a long time, preferably 5 years and above.
Your Take Away
The following tips can help to get you started:
- You can start investing with as little as N10,000
- Invest only the money you can afford to lockup (“forget”) for 5 years and above
- Put your money 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 to remain invested, the more your money can grow.
Before you invest in ordinary shares of a company, you should look at the 5-year financial statements of the company.
In particular, you should look at its
- earning capacity,
- debt profile
- share price history
- dividends history
- earning per share
- dividend yield per share
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 matters, 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
Founder: Ijenhi Business Solutions.