Investing in Shares
What is a Share?
A share (or stock) is a stake in a company. When you buy a share, you become a part owner or a shareholder of the company.
What are the different types of shares?
Ordinary shares (also known as equity shares) – these are shares or stocks that give the shareholder part ownership of the company in proportion to the number of shares held. The ordinary shareholders have voting rights and can appoint and dismiss directors. If the company makes a profit, they are entitled to a share of it in the form of dividends, if declared, which are based on proportionate ownership. In the event of liquidation, ordinary shareholders are paid last after everyone else who has a claim on the company’s assets has been paid.
Preference shares- Preference shares bear a fixed annual rate of dividend with priority over all ordinary shares in the distribution of dividends from annual profits and have a prior claim to repayment on winding up the company. Shareholders in this category have no voting rights in a company, but are given priority with regard to dividends and repayment in the event of winding up.
Redeemable Preference shares- These are shares that can be redeemed (paid back to the shareholder) by the company either at fixed dates and prices, or on certain specified terms at the discretion of the Board of Directors.
Advantages of owning shares
As a shareholder, there are several advantages that come with owning shares. These include:
Dividends: When a company makes a profit, the Board of Directors usually gives a percentage of the profit to its shareholders. This is known as a dividend. In other cases, the directors can propose to retain the profits in the company in order to increase its capital. These are known as retained earnings. Ideally if profits increase from year to year, then the dividend should also increase. Shares therefore offer the possibility of an increasing income to the investor.
Capital growth: If the company is growing, the value of the shares will also grow.
Capital Gains: When shares are sold at a price that is higher than the price at which they were purchased, this represents a profit. This profit is called a capital gain.
Voting rights: Shares give a shareholder the right to attend and vote on important company policies at the company’s Annual General Meetings including making a choice on the directors of the company.
Collateral: Shares may be accepted as collateral (for example security for a loan).
Transferability: Shares are negotiable and can be passed on to another person; and they can be inherited.
Disadvantages of owning shares
Much as there are good things associated with owning shares there are some considerations that need to be taken on board, these include:
Share prices can go down or up depending on a number of factors such as the performance of the company, the economy, demand and supply factors.
If the company’s profits fall, the dividend will fall and if the company makes a loss it may not be able to pay any dividend.
If the share prices fall, their value lessens and if the company collapses or becomes insolvent, the shares become worthless.
If the company goes into liquidation, shareholders are the last to be paid after all other creditors.
How are shares bought and sold?
Shares can be bought either during the initial offer period or from existing shareholders. New issues of shares usually take the form of Initial Public Offerings (IPOs), where shares are sold in a primary market. The purchase from existing shareholders takes place in a secondary market.
Primary market- this refers to the purchase of shares in an Initial Public Offering (IPO), whereby a company offers its shares to members of the public for the first time. To buy these shares, a Share Application Form (SAF) is obtained from participating broker/dealers and authorised selling agents, which is completed by the prospective investor.
The Share Application Form (SAF) is then sent to the Lead Broker and Registrar for processing, where the share allocation is made. Once payment is made, a receipt is issued to the purchaser.
If the offer is over-subscribed (applications exceeding the number of shares available), the shares available are divided among applicants according to the allotment criteria and the investor then receives a refund for the shares paid for, but not allocated.
The USE then deposits shares on the Securities Central Depository accounts of successful applicants.
Secondary market- At the secondary market, shares can only be bought or sold through a licensed broker/dealer, that is a firm that buys and sells securities on behalf of investors for a commission or a brokerage fee.
The broker/dealer or investment advisor will provide all the necessary advice, that is, which shares to buy. But the ultimate decision to invest your money is up to you, the investor. Before investing in shares, you should be clear about your own financial position and what you hope to achieve from your investment.
To sell shares, an investor needs to contact a broker/dealer and instruct him/her to sell either all or some of your shares.
Secondary market trading takes place at the Uganda Securities Exchange (USE) everyday from 10.00am to 12:00pm. Information about trading on the USE is normally published in the newspapers daily.
CMA issues licences to qualified firms or persons to transact business on the Exchange or give investment advice. These are known as broker/dealers and investment advisors or fund managers. The list of licensed persons can be obtained on the CMA website home page.