What are Stocks and Shares?
A stock is a share in the ownership of a company. In investment, the terms stocks, shares, or equity are used interchangeably, and they mean the same thing.
Shares are a unit of ownership that usually carry voting rights that can be exercised in corporate decisions. However, not all shares have voting rights. Equally one has to remember that with companies of any size, such as those quoted on the Nigerian Stock Exchange, your vote as one of thousands of shareholders will have little influence. This is why shareholders elect a Board of Directors which owes them a fiduciary duty to make the company perform well, thereby increasing the value of the shares. However, as a shareholder, you can speak and vote at the company’s Annual General Meeting (AGM) and in many countries even small shareholders are making their opinions on, for example, ethical and environmental issues, really count.
There are typically shareholder rights such as the right to purchase any new shares issued by the company, and the right to a relevant share of the company’s assets if it is liquidated. Shareholders rights to a company’s assets are however subordinate to the rights of a company’s creditors.
Shares also carry the right to have a share of the profits of the company in the form of a dividend. However, companies are not obliged to pay dividends (except to holders of so-called preferred stock or preference shares) and in tough years they will often decide not to pay a dividend. In this case the only benefit from the shares comes from growth in their capital value.
Investing in the shares of a company means that you become a part owner of the company and therefore share in the fortunes and misfortunes of the company. There are two main factors that can affect the share price of a company: factors relating to the business itself which may cause the share price to go up or down, and factors relating to the general economy and investors sentiments.
Although shares go up as well as down, and it is possible to lose your principal investment, historically shares have been known to provide real return on investment over the long term in spite of the volatility which they exhibit. For this reason, you have to be prepared to invest for some time, and to hold your nerve through the bad or flat times, to really maximise their benefit.
What are the benefits of stocks and shares?
- Shares have historically out-performed other investments such as bonds, money market investments or straightforward savings accounts. Only property can match or exceed them in a strong property market.
- If you are prepared to hold shares for a long while, for example five years, you should benefit from their potential to generate capital growth.
- Shares are a good hedge against the eroding effects of inflation and for this reason are suitable for achieving long term investment goals such as retirement.
- You can also derive both income in the form of dividends and capital growth, although, as explained above, this may not always be the case
What different types of Stocks and Shares are available?
There are different types of Shares such as Ordinary Shares or Common Stock, and Preference Shares.
What is more important in this section however is the selection of shares in different types of companies, in different sectors.
Some companies that are mature and offering a known, stable, in-demand service or utility are relatively stable safe bets. They may not bring you the highest returns but they will be relatively secure (less volatile).
Other early-stage, entrepreneurial companies in high-growth areas like, say, mobile telephony may be riskier but potentially give higher returns if they do well.
You have to assess what level of financial return you want and what level of risk you are prepared to take to achieve it. Higher growth potential often comes married to higher risk. We can help you determine what we call your risk-return profile and invest accordingly.
Are they for me?
Shares are among the best long-term investments. The stock market offers a reliable method of building wealth long-term. This means that investing in shares should be part of your overall financial plan, especially where you have medium to long term investment horizon.
Many people, including those with quite modest wealth, either own shares directly or have assets such as pensions partly invested in equities.
What tips can ARM provide?
- You need a good advisor, especially when you are new to investing. You can get advice and sell and buy stocks and shares from our unique ARM Investment Centers.
- You need to work out your needs from shares – perhaps specific life events which you need to fund – your time-frame, and your risk-return profile.
- It is often important to diversify your investment in shares to spread risk and maximise the chance of getting high returns.
- It is important to have a long term horizon when investing in shares
- You can study companies yourself to gain some investor insights. You need to look at their track record in profits and revenue growth; their cash flow; how competitive their products and services are and how easily they might be copied or bettered; their investment in Research and Development as a percentage of their turnover. However, the movement in prices of shares is not entirely logical and therefore not predictable. There is sometimes an amount of speculation and emotion. Investing in shares requires the insight of an expert. Therefore, we recommend that you speak with one of our advisors who will recommend the most suitable way of investing in shares.
How do I start with Stocks and Shares?
Visit an ARM Investment Center or call an ARM Wealth Advisor to buys stocks and shares.
Last Update: June 19, 2017