Stock-pick, or the selection of shares for investment is a fundamental skill of successful wealth creators. Investment managers, or even finance-savvy individuals, who wish to build long-term wealth can use shares as a powerful tool to generate wealth. In this editorial, we are looking into the characteristics of investment in shares, and how you can begin (or continue) your journey in the big world of investment.
What are shares?
This may seem like an elementary question, but in the world of investment, where things tend to easily become overcomplicated, it is always a good idea to return to base definitions. So… what are shares? Simply put, shares are units of ownership in a company, which are also known as stock or equities. When you buy a share , you are acquiring a partial ownership stake in a company. Purchasing shares entitles you to certain rights and benefits, some of which are listed below:
- Voting rights, which allow you to vote at the company’s annual shareholder meeting.
- Dividend payments, which entitle you to a share of the company’s distributable profits.
- Capital appreciation, which increases your shares’ value when the company’s stock price rises. Evidently, when the price of a stock declines, the value of your shares also decreases.
The benefits procured by stock investment depend on the types of shares you own. It is important to understand that owning shares does not mean that you get a say in any given company’s day-to-day operations. When you own shares of a company, you are essentially trusting the company’s leaders to run their ship to the best of its capacity, so that you get better returns on your investment.
The Different Types of Shares
Ordinary shares and preference shares are two common varieties of shares issued by companies. It is worth noting that some companies also have different classes of shares. As previously mentioned, each class of shares determines benefits such as voting rights, dividend payments, and your rights for recuperating your investment if the company files for bankruptcy.
Ordinary Shares (Common Stock)
Ordinary shares are shares of ownership in a company. It is the type of shares in which most people invest. When the layman investor talks about shares, they usually refer to ordinary shares. The great majority of shares is issued in the form of ordinary shares. Ordinary shares give voting rights to investors. Though they also generally entitle investors to dividends, dividend payments are not guaranteed. Indeed, companies have the possibility to choose to pay dividends or not, depending on the capacity and needs of the company.
Preferrence shares usually do not come with voting rights. However, this type of shares places its investors ahead in the dividend-payment line in comparison with common stockholders. In the event of a company going bankrupt, preferred stock owners are also ahead when it comes to recuperating their investments.
There exists other types of shares which we will explore in a future article about Different Classes of Shares.
Are Shares the relevant investment vehicle for you?
Shares are far from being the only investment vehicle at your disposal if you are trying to accrue wealth. As a matter of fact, shares are higher-risk investment vehicles, when compared with bonds and Certificates of Deposits (CDs). That being said, historically, stock investment is considered one of the most effective ways to build long-term wealth.
Financial advisors usually direct their clients towards building an investment portfolio, which is composed of several investment vehicles. The composition of such an investment portfolio will greatly depend on your profile as an investor. To determine this profile, you will need to make some decisions about your investing style, your budget, and your risk tolerance (also called risk appetite).
AXYS Wealth Creators advise clients on how to better invest their wealth. Get in touch with us now.