Equity Basic

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Equity Basics

Have you ever wanted to own your own business, but didn’t want to actually turn up for work every day? Wouldn’t it be great to just sit back and enjoy the dividends as the company grows overtime? Does that sound too good to be true? Well it’s not; in fact, that’s what many persons choose to do when they invest in a listed company. But before you go and quit your day job perhaps you should learn a bit about how stocks work.

By purchasing shares in the company, you effectively become a part owner in that company which entitles you to the benefits and the risks of ownership.

What are the benefits of owning shares?

  • Right to information – As a shareholder in a company you are entitled to have information on the performance of your investment.  As a result, on an annual basis the company would send you the financial reports so that you can assess how the company is progressing.
  • Right to a voice- In addition to receiving financial information, a shareholder has the right to attend and speak at shareholder meetings. By law, listed companies have an Annual General Meeting each year but in addition to these regular meetings Special meetings may be called when important matters face the company. As a shareholder you would have the right to ask any questions you may have of the Board of Directors.
  • Right to a vote- Not only is a shareholder entitled to a voice; a shareholder has the right to vote on matters arising out of the shareholder meeting. This is something which should not be taken for granted; since a shareholder does not have a say in the day-to-day running of the firm they do have a vote in the election of the Board of Directors who have the authority to replace the management team for non-performance. Voting rights are proportionate to your share ownership in the company.
  • Right to share in the performance of the company- As a shareholder you benefit from the performance of the company. This can come in two ways; firstly through dividends paid by the company to shareholders and secondly through improvements in share price over time.

 

Like everything in life there are risks involved in equity investments.  As mentioned earlier an owner shares in the performance of the company; while this offers potential for gains there is also the possibility of losses as a result of poor performance. Remember a company may choose to forego paying a dividend after a bad year and just as it is possible for a share price to rise, it can also fall.  And in the worst case scenario of a company which has to fold for poor performance, the shareholder has to wait until all the company’s debts are paid off before distributing what is remaining to shareholders.

So in light of this you may ask yourself why should I invest in equities at all? The answer is simple; returns. History has shown that over the long-term stock has outperformed all other asset classes. Therefore despite the short term fluctuations over the long term, stocks typically provide excellent value for money and should form a part of a balanced portfolio.

We hope you’ve enjoyed this article. Feel free to give us a call at 434-2363 to discuss how our experienced brokers can assist you with reaching your investment goals today.

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