Shares (Equities) are issued by companies to raise capital or financing from investors. When you buy a company’s shares, you become a shareholder of the company. Shareholders are usually entitled to a share of any dividends that are declared and paid.
If the company you have invested in is wound up or liquidated, you are entitled to any assets that remain only after the company’s creditors have been paid. Many investors are concerned about the potential volatility of shares but as the chart below shows, even when there has been significant financial, political and economic problems in the world over the longer term they generally return good growth:
There are broadly two classes of shares – ordinary or common shares and preference or preferred shares. In this guide, we use “shares” to refer to ordinary shares.
Ordinary shareholders have a right to attend and vote at general meetings on matters such as a major acquisition/disposal or the appointment of directors.
A general meeting provides a forum for you to engage the company’s board/senior management and voice your views on matters affecting the company.
Shareholders earn returns when they receive dividends and if they decide to sell their shares when the price of the shares gain in value.
Dividends are paid out of the company’s profits.
Not all the profits may be distributed. Companies may choose to re-invest profits generated from their operations into their business. A company’s share price reflects, amongst others, its growth prospects and future earning potential.
Investors buy shares in the expectation that the share price will rise. Some may also buy shares as a hedge against inflation or for dividend income.
Share prices are driven by economic and market conditions, as well as industry and company specific conditions. Much of the price movement of a share may be explained by how the overall market is performing.
But not all shares react in the same way to the same set of economic, market or business conditions. Shares are often sorted into categories based on the characteristics they have, for example some shares may be referred to blue chips, or be perceived to have growth or cyclical tendencies.
Such categorisation is based on market convention and may change over time. A company’s market capitalisation is the total market value of its shares.
Shares may also be sorted by market capitalisation, for example, small aps, mid-caps and large caps. What constitutes a small, mid or large cap depends on the particular market you are interested in. Stocks with smaller market capitalisation may be newer companies, and not very well-researched.
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