If you have idle cash which you do not intend to use any time soon, you can invest it in ordinary shares of profitable companies.
There are quite a number of profitable companies that you can buy Ordinary Shares from.
For example, in Nigeria, the banking sub sector of the economy is the most active and attractive sector on the Nigeria stock exchange.
However, before you buy shares, you need to ensure that the:
- companies are listed on the Stock Exchange.
- Shares you are buying are traded on the floor of the stock exchange.
This article is, therefore, focusing on the advantages you can derive from investing in Ordinary Shares.
Investment in ordinary shares: Voting Rights
When you invest in the shares of a company, you automatically become one of the owners of that company.
This is because you have contributed to the share capital of the company.
It does not matter the number of shares you hold.
Beyond that, you will always receive notification to the company’s Annual General Meeting.
Furthermore, your shares in the company entitle you to vote in AGM 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 you are a majority or minority shareholder.
Investment in ordinary shares: Dividends
Another benefit of investment in ordinary shares 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 and declares dividends.
What is more, you should note that it is the company’s Board of Directors that decides whether the company will pay dividend or not.
In addition, if the company declares and approves 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 can get paid.
Payment of dividends
If you receive notification of dividends payment, you can simply complete an e dividend form authorizing the company’s Registrars to pay your dividends direct to your bank account.
You will need to submit the e dividend form to your bank for onward transmission to the company’s registrars.
Once you complete the e dividend form, the registrars will pay your dividends straight into your bank account.
Alternatively, you can opt to reinvest your dividends by using the money to buy more shares.
Investment in ordinary shares: Capital appreciation
Investing in the ordinary shares can make your money to grow.
For example, if the price of the shares rise above the price you paid for the shares, the difference represents capital appreciation. And that is a plus for you.
If the company has substantial balance in its share premium account, it can distribute part of the funds to existing shareholders as bonus shares.
They are called bonus(free) shares because you do not need to pay for them.
This is usually done when the company wants to restructure the share capital of the company.
Accordingly, 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 both interim and final dividends payments.
Investment in Ordinary shares: Rights Shares
If the company wishes to raise more funds internally instead of borrowing from the bank, it can offer rights shares to existing shareholders.
They are called rights issues because they are reserved for existing shareholders.
In other words, it is available to the public for subscription.
However, unlike bonus shares, you will need to pay for rights shares. They are not free.
If you receive notice of allotment, you will have two options.
The first option is for you to pay for the shares.
The second option is that you can sell the shares allotted to you to anyone who may care for them.
More importantly, if you eventually pay for the shares, they will be added to the shares you already have.
Bonus shares also rank for dividend payments.
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 is in the Companies and Allied Matters Act, (CAMA).
The price of ordinary shares on the stock exchange rises and falls on daily basis,
Thus, the prices on the stock exchange are 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.
You 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.
Ordinary shares: Ease of Purchase and Sale
Another important benefit of investment in ordinary shares is that ordinary shares are easy to buy or sell.
However, you should note that the shares of blue chip companies (profitable companies) are easier to buy or sell.
This is because investors are always looking out for companies with impressive track records of earnings, profitability, dividend payments and business growth.
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.
A Stock broker knows the best time to buy or sell shares.
Another interesting 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.
Long Term Benefits
The long term benefits of investment in ordinary shares is that they perform better than bonds, mutual funds, money market funds and ethical funds.
Therefore, when you buy ordinary shares, you should allow the investment to remain invested for a long time, preferably 5 years and above.
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 of the economy in other 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
- earnings per share
- dividend yield per share
Bonus: For now in Nigeria, 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 can seek for help from registered stock brokers or an accountant.
A stock broker knows the best stocks to buy. Furthermore, he also knows when to sell.
By Samuel Ijenhi
B. Sc Accounting, University of Benin
Benin City, Nigeria
Founder: Ijenhi Business Solutions.