Getting Started in Shares - What you must Know Before you Start

WHAT ARE SHARES?

A share is simply part ownership of a company. Shares represent holder’s claim on the assets and profits accumulated by the company. Buying more shares of a company increases one’s ownership stake in in the company. Companies raise money to finance operations and expansion plans by issuing shares to the public who in turn become investors in issuing companies. These shares are listed on a securities market (exchange) to facilitate their trading by members of the public. When buying company shares means that you have become part of a group of owners (shareholders) of a company and therefore has a claim on all assets of the company and potential future benefits that will be generated from these assets.

TYPES OF SHARES

i) Ordinary Shares:

These are the most commonly issued type of shares, essentially carrying voting rights but no special rights beyond that. Therefore ordinary shareholders will usually have the right to vote at a general meeting of the company. They have the potential to give the highest financial returns, but also carry the highest risk in that ordinary shareholders are paid last when the company winds up.

ii) Preference Shares:

In most markets, these are slightly less preferred type of shares. They carry a special or preferential right that gives the holders priority over holders of other types of shares during the distribution of annual dividend to shareholders. Preference shares typically carry no voting rights.

iii) Redeemable Shares:

These are shares issued with the shareholder agreeing that the company can buy them back either after a certain time period or on a given future date; that is, be redeemed. Redeemable shares can vary according to which party, either the company or the shareholder, has the option to exercise the company buyback provision.

 WHY INVESTORS INVEST IN SHARES?

Investors buy shares for various reasons. Here are some of them:

i) Capital appreciation, which occurs when a share rises in price;

ii) Dividend payments, which are received when the company distributes some of its earnings to shareholders;

ii) Ability to vote at annual general meetings and influence the running of a company.

 WHY DO COMPANIES ISSUE SHARES?

Companies issue shares to raise capital (money) for various needs, which may include:

i) Introducing new products;

ii)Expanding into new markets;

iii) Improving business infrastructure or building new ones.

Issuing shares in another source of financing the company.  The money that a company raises by issuing shares is called equity capital and does not have to be paid back like debt capital which is borrowed money. Equity capital symbolises perpetual ownership of the company. In return for investing in shares, shareholders receive income in the form of dividends and other benefits. Important is that shares that have been issued to investors by a listed company can be sold to other investors on the securities market. In this way, shareholders can realise capital gains if the share value or price has increased – in other words, make profit by selling their shares for more than what they paid for them

WHAT ARE THE BENEFITS AND RISKS OF SHARES?

Shares offer investors the greatest potential for growth in the form of capital appreciation over medium to long term in addition to potential dividends. Investors willing to keep their monies invested in shares for a long time are generally rewarded with strong, positive returns. But shares are subject to bi-directional price movement. Therefore investing in shares does not offer any guarantee whatsoever that the company’s shares will grow and do well, so there is a possibility of losing money in shares too. If a company is in financial difficulties and files for administration or winds up, ordinary shareholders are the last  to be paid from the proceeds of the sold assets. The company’s creditors will be paid first, then holders of preference shares and lastly the ordinary shareholders.

But, even when a company is in financial doldrums although not in danger of failing, its share prices may swing up or down depending on its performance. If you, as an investor, have to sell shares on a day when the price is below the price you paid for the shares, you will lose money on the transaction. Alternatively if you sell shares at the price higher than you paid, you will gain money on the transaction and that profit made is called capital gain.  Share price movements in the market can be discomforting to some investors. A share’s price can be affected by internal factors in the company, such as a defective product, or by events beyond the control of the company, such as changes in weather or market events. The risks inherent for holding shares can be offset in part by investing in a number of different shares or investing in other kinds of assets that are not shares, such as bonds.

 THE CONCEPT OF DIVERSIFICATION

One of the most famous phrases used in relation to successful investing is “don’t put all your eggs in one basket” usually warning investors not to invest their monies in a single or same class of financial securities, assets or instrument. The Lesotho domestic financial markets have, for a long time, been dominated by Government of Lesotho’s Treasuries (both the T - bills and the T-Bonds) with the glaring absence of other assets from the corporate sector. The introduction of such investment assets in the market from corporate sector provides an opportunity for investors to diversify their portfolios (that is, the ability to invest in different classes of assets). Consider, for example, an investment that consists of a single type of investment asset, say bonds for instance, issued by a single company. If that company's performance plummets, your portfolio will bear the full brunt of the decline. By splitting your investment between different classes of assets (e.g. shares, bonds, cash etc.) from two or more different issuers (companies and governments), you can reduce the potential risk to your portfolio. Markets in shares for instance, move in cycles. Some investors fall into the trap of putting all their money into one asset class, usually at its peak, and then cannot benefit as the value of another asset class they do not hold increases. It is better to diversify, spreading risk, and enjoying the upswings in markets.

 FIRST-TIME SHARE INVESTORS

You may now have learned what shares are and you are eager to get started so that you, too, can take the opportunity provided by these assets, but take a moment to reflect on some simple questions. The time spent now to consider the following will save you money on the road ahead.

i) What are my goals?

ii) How much money should I invest?

iii) When should I invest?

iv) How should I invest?

v) What are the tax implications?

WHAT ARE MY GOALS?

First of all the question of what one needs to achieve has to be objectively addressed. You need to articulate those goals for yourself and set out strategies to achieve them. Financial freedom means a lot of different things to different people. Other people may want to go on early retirement, be able to pay tuition fees for self and children, travel around the world for leisure or afford mortgage for that dream house. It is truly a matter of age and a stage in life that’s important. Taking a moment to reflect on those goals will inform your decision on how much money you will need to invest either as a lump sum or in smaller and incremental amounts to achieve them. Then consider how hard your initial investment will have to work in order to accumulate the money you need to achieve your goals.

HOW MUCH MONEY SHOULD I INVEST?

You can invest small amounts of money in shares quite effectively because the cost of doing so is low compared to many other investments. However, one should  be consistent in investing in shares and have a longer horizon in mind in order to realise full benefits. First think about your goals and level of risk you are prepared to take. Then you can allocate the appropriate amount of money to shares as part of “eggs in your investment basket”.

WHEN SHOULD I INVEST?

Once an optimal mixture of investment assets has been determined, it is then time to invest. Find and contact a broker you want to work with, for advice and way forward in placing your orders. Then, fill out the paperwork, deposit some money and open an account. You are now ready to go but don't do it all at a go, buy in incremental amounts. This will allow you some degree of observation on the direction the market is taking and ensure that you avoid putting all your money just before a market slumps. Losing lots of money quickly would kill your enthusiasm in the market. Plan to take time, read up and catch up on the news for your investments and seek professional advice if in doubt.

HOW SHOULD I INVEST?

This can be done in two ways;

i) Direct Investing:

This is when the investor acquires shares of individual listed company in his or her own name with the assistance of a broker and it becomes the responsibility of the individual investor to maintain his or her own portfolio. Direct investing gives the investor choice and control over costs because you are not paying anyone to manage your investments.

ii) Indirect investment:

This commonly takes place when the investor buys into the managed investment funds. Managed funds are a type of collective investment schemes that pool funds of many individual investors together with the purpose of investing them. They are actively managed baskets of securities, designed to beat the market with the assistance of a specialist fund manager. Some funds invest in just one type of investment such as shares while others are diversified, investing across a range of asset classes including shares, bonds, property securities, cash etc.

WHAT ARE THE TAX IMPLICATIONS?

To optimise their after - tax returns, investors should have at least a basic understanding of the tax treatment of different types of investments. Investors are liable for income tax on any income they receive from their investments. Please note that resident and non-resident individuals may be subject to different tax rules.

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