Shares are a type of financial security that gives you ownership rights in a corporation. Also referred to as stocks, shares are called securities because you are guaranteed certain privileges on a corporation’s profits. Owners of shares are called shareholders.

Shares Give Ownership

You own a company up to the number of shares you purchase. Corporations are legal entities on their own. This means that corporations can own property/assets in the same way a person can own them. A company’s properties include the office buildings, the furniture, intellectual property, and the capital its owners contribute. These are recorded on the company’s books as equity.

The more shares you buy from a company, the more of the company you own. You own those shares just as you could own the land on which the company sites its building.

Shareholders Earn Dividends

Shares give you a legal claim on the company’s future profits. This return, paid at the end of the financial year, is called a dividend. Unlike bonds and other debt instruments which generally have fixed returns, dividends on shares could vary depending on a company’s profitability.

Risks and Rewards in Owning Shares

Shares are riskier than bonds because they don’t have fixed dividends whereas bonds guarantee you both the principal and interest at regular intervals. Even in the event of bankruptcy, the company’s assets will be sold to repay the principal in full.

Shareholders, on the other hand, are only paid if the company makes profits. On the upside, there is no limit to how much shareholders will receive in dividends. A profitable company will pay high dividends unless shareholders vote to plough profits back into the company.

On the stock market where shares are traded, changes in share price could lead to price appreciation or depreciation. Assuming the market price of your shares increases, you enjoy a windfall in your capital. This boosts your net worth as a person. When the price falls below the amount you paid to purchase the shares, you suffer a capital loss.

Types of Shares

Most shares are classified as common stocks. These are shares that come with voting rights and have the highest potential returns in terms of dividends. They are also the riskiest because they are paid after debtors and other shareholders are paid. In the event of bankruptcy, a holder of common stocks might get next to nothing for owning shares in the failed company.

Preference shares are a special class of shares that offer guaranteed dividends in perpetuity. Unlike common stocks, preference shares are less risky because they receive dividends before other classes of shares. In some cases, preference shares are callable. This means the issuing company can redeem the shares at a point in the future and pay shareholders an agreed price.

Because of their similarities to bonds in terms of fixed dividends, preference shares are an important addition to your investment portfolio. They cushion volatility in earnings and offer a guarantee on the initial price even if the market price falls.

Preference shares holders don’t have voting rights.

Shareholders Have Voting

Because shareholders own assets of a company, they get to vote on what the direction of the company should be. Voting sessions are normally held during ordinary meetings to discuss important decisions management and the board of directors intend to take.

Common stockholders can, therefore, decide on the direction of a company by voting in favour of or against the management’s plans. Before a company issues more shares to the public, its board is mandated to seek permission from shareholders who are the real owners of the company.

The more shares you have, the more votes you’ll have.

Stock Markets

A stock market is a place where financial securities are traded. It’s also called a bourse. When companies sell shares for the first time, they do so on the stock market in what is called the Initial Public Offering (IPO). After the IPO, shares are traded for cash on the stock market. Share prices of listed companies on stock markets are influenced by demand and supply factors. Consequently, share prices change as they are traded. When the price rises above what you paid to acquire it, you receive a capital gain on your investment. You lose capital if the share price plunges below your invested price. In Ghana, shares of public companies are traded on the Ghana Stock Exchange.