Overview
Shares also known as stocks or equity. These are words that are used interchangeably and basically mean the same thing. Shares are the units of ownership interest in an organization. Thus, anytime we say you have shares in a company, it means you are a part owner of that company. This ownership right gives you the mandate to be called a shareholder. Over here you have a right to participate and benefit from the company and also bear the liability of that company. Thus, if things go well with the company, you enjoy that benefit and when things go bad, you also bear some losses. This is why shares are seen as risky investments. You are not guaranteed of the future. If the future is profitable, you enjoy, if the future is with losses you also suffer to the extent of that loss.
Types of Shares
There are two main types of shares
Ordinary/common stocks
Most companies issue common stock. The stock may benefit shareholders through appreciation and dividends, making common stock riskier than preferred stock. Common stock also comes with voting rights, giving shareholders more control over the business. Almost all stocks you will see are of this nature.
Preferred stocks
Preferred stocks on the other hand does not offer appreciation in value or voting rights in the corporation. However, the stock typically has set payment criteria; a dividend that is paid out regularly, making the stock less risky than common stock.
Because common stocks give owners more rights and benefits as compared to preferred stocks, if the business does not do well and it is about to collapse, preference shareholders are settled before the remaining given to common shareholders.
Benefits of investing in Shares.
When you invest in shares, you will make money in two ways:
Dividends. These are generally paid from the after-tax profits of the company. Dividends are often paid at the end of the accounting period but some companies based on their dividend policy make payments every six months( interim dividend). Directors decide the proportion of earnings to be paid to shareholders, subject to shareholder approval. Note, however, that a company may not pay dividends (preference shares are exempted from this since they are a different class of shares that enjoy a fixed rate of dividends). The reason for this may be that the company is currently unprofitable, or that it is fast-growing and needs to use all cash generated to invest in productive assets.
Capital gain. The share price rises over time due to an increase in the underlying value of the business (or to temporary enthusiasm for the shares by investors, which may or may not be rational). Lets say today the price of SIC shares is 0.20, in two years’ time, the price went up to 0.50. The capital gain is the difference (0.50 – 0.20) = 0.30 per share.
How do you buy shares?
Before you can buy shares, you will need to contact a broker. A broker is an individual or a company that buy/sell shares on the behalf on clients. This broker will act as middlemen in the transaction to ensure that the buyer and the seller gets what each of them want. Check the list of brokers and their contacts here.
You can just pick up your phone and call any of the brokerage firms. They will give you a form/help you fill in a form just like a normal account opening form which will help them to generate a unique CSD account number for you. So anytime you want to buy shares, you just use that unique number to place your orders. This unique number is to keep track of all the shares you own and in which companies you own them. This is to say that, once you know you number, it can tell which and which companies you own shares in known as your CSD number (CSD = Central Security Depository).
After you have your account ready, you will need to pay into your brokers account at the designated bank the amount of money you will want to invest and place an order after the money has reflected in your account.
Currently, there are developments in the market to make the buying/selling of shares easy. Thus, using your phone through mobile money or via online. The most common way now is calling your broker. But some of them have platforms that after depositing your funds, you can place the order on that platform.
How much do you need to buy shares?
To make is easier for you, after selecting from or choosing which of the companies you want to buy shares in, you will have to buy at least 100 units of that stock. Example. Let’s say you want to buy MTN’s share, you look at the price and multiply by 100. So, let’s say the price of MTN is 70 pesewas; 0.70 x 100 = Ghs 70.
Note that the 70 cedis is not all that you need. You will need to pay a transaction fee between 1.5% – 2.5% of the value of your transaction. Thus 70+(70 x 2.5%) = Ghs 71.75.
Any value or amount of share you buy will attract that 2.5% as transaction fee which has its own details. But let’s leave that for subsequent articles.
Though you can even buy 10 shares, it is just advisable you buy in units of 100.
Ways of paying for your shares
- Send a cheque in the post. Your broker may not be willing to buy for you until the cheque is cleared, especially if you have a three-day deadline for settlement.
- Cash deposit into brokers’ account.
- Open a deposit account with the broker or bank. Your broker is able to draw money from the account on your behalf at any time to settle deals.
What happens after dealing?
Currently, after 3 working days of executing your trade, you should have a contract note, signifying the number of shares bought for you and at what price together with the total fees you have been charged sent to you mostly via mail. This is more like a letter of ownership or change of title of ownership of the shares.
What you have to know.
When you place an order to buy/invest in shares, the order is placed on the market and a seller will have to be matched to your buy order to complete the transaction. Which means that, when the share you want to buy has nobody selling, your order will be in the market for some time.
To correct this issue, it is advisable to buy share that are liquid. Liquid shares are those stocks that are almost or most of the time having a seller and a buyer. Eg MTN or Calbank.
Because you will need an exceptional skill in selecting stocks to buy, which is often a difficult thing to do for a new investor, you can engage the services of the broker you are using to help you select good buys.
Dividends received are subject to a tax of 8%. Thus you will pay a tax of 8% on dividends you will be paid. This will be deducted before your balance is sent to you. Capital gains on the other hand are not taxed.
Shares have generally been a good form of investment for the long term. Because of the uncertainty in the future, they can produce negative returns at times and exceptionally higher returns in other periods. This is why, it is only advisable to invest in shares if you want to invest for a long term (average of about 5 years). Shares should be viewed as long-term investments and not short-term gambling counters.
Share investors must be able to accept that equity markets can fall by very large percentages during a day and that individual holdings can become worthless overnight as companies go into liquidation. If you are unable to accept this degree of volatility perhaps you should be investing somewhere else. Eg Treasury bills, Mutual funds,…etc.