Share Types

Types of shares

Depending on their capital requirements, many companies issue different types of shares in addition to ordinary shares. Each type of share and separate classes within each type may have different rights attached.

Your stockbroker can help you to understand the advantages and disadvantages of various types of shares before you invest in them.


Ordinary shares


• Represent the bulk of a company's basic ownership money or equity capital.

• Shareholders benefit from any distributions of dividends and can vote at company meetings. The more ordinary shares they own, the greater their control over the company.

• Rank last behind other types of shares if the company is wound up


Preference shares


• Are entitled to a preferred dividend paid before the ordinary dividend is announced. The dividend is often paid at a fixed rate.

• Have priority over ordinary shareholders for repayment of capital if the company is wound up.

Trust units


• In the form of property trusts and equity trusts.

• From an investor's point of view, units in listed trusts are similar to ordinary shares except that a full distribution of profit is made to unit holders instead of a dividend.

Contributing shares


• A company may issue new shares without requiring full payment immediately. In such a case, it may issue the shares on a contributing or partly-paid basis.

• Shareholders make further payments on certain dates or in some cases, may forfeit their shares.

• Have equal voting rights with ordinary shares and dividends are usually paid on a pro-rata basis.

Rights and bonus issues


Companies can make special issues of rights or bonus shares to shareholders. As a shareholder, it is important for you to understand what each issue entails and the important dates involved. If you have any doubt about such issues you should contact your client adviser/stockbroker.

Bonus issues


Bonus issues are shares issued free of charge to shareholders. The size of the issue reflects the improved value of the company's assets.

Bonus issues are made on a predetermined pro-rata basis, for example, one for ten.

This means you will receive one new share for every ten you currently own. For example if a company in which you hold 1,000 shares announces a 1-for-10 bonus issue, you are entitled to 100 more shares at no cost, which would bring your total holding to 1,100 shares.

Once a bonus is issued, the price of the shares is likely to drop as the value of the company's assets is now spread over a larger number of shares. Bonus shares dilute the market price of the shares in direct proportion to the increase in the total number of shares on issue.

This price adjustment occurs on the ex-bonus (XB) date. An investor who buys the existing shares on or after the XB date is not entitled to the bonus shares - they belong to the previous owner of the shares.

Rights issues

A rights issue entitles existing shareholders to take up additional shares in the company at a below-market price and without having to pay brokerage. Rights issues enable the company to raise additional funds from shareholders, perhaps for expansion or to repay debt. For example, Company X may have a rights issue to raise $300 million to fund its takeover of Company Y.

The process for a rights issue is similar to a float, in so far as a prospectus is prepared and an underwriter is often appointed. Shares are offered on a predetermined pro-rata basis, for example, 1 for 4. This means that for every four shares you own, you can purchase one additional share at the discounted price.

A rights issue may be renounceable or non-renounceable. Renounceable means shareholders are entitled to sell their rights to other investors on the sharemarket if they do not wish to take up the additional shares themselves. Non-renounceable means only existing shareholders can participate and you must either take up the shares or forfeit the rights.

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Evaluating investment opportunities

Evaluating an investment

Evaluating investment opportunities (e.g. shares, property, bonds) is easier if you use a standard set of criteria to measure and compare them. While each investment must be evaluated in the context of your personal goals and objectives, in most cases the following characteristics may be considered:  

•  Return on investment (ROI)

•  Capital and income security

•  Risk

•  Transaction costs

•  Minimum investment amount

•  Liquidity

•  Ease of investment
  
• Taxation

Return on investment

Return on investment will usually be in the form of income (a payment you receive from your investment) or capital growth (where the value of your investment increases over time). Some investments, such as shares, may provide both.

Income

Investment income may include amounts such as interest on bank accounts, dividends from shares, rent from a property and distributions from a trust. As well as the amount of income you are likely to receive, you should consider the likely frequency and regularity of the income payments and the potential for any increases or bonuses. Does the investment pay distributions, weekly, fortnightly, monthly or yearly?

Income from investments is usually subject to income tax at your marginal tax rate.

Frequency of income payments

The frequency of income payments is a key factor in determining the yield for an investment.

Compare three investments of $100,000 each with a 6% interest rate: the first paying annual coupons, the second paying semi-annual coupons and the third paying quarterly coupons.

Even though you receive coupons totalling $6,000 over the year from each investment, when you take into account the timing of the coupon payments the yield can vary. This is because the sooner you receive your income payments the sooner you are able to reinvest that money.

This means that the yield for an investment paying 6% quarterly may be higher than the yield for one paying 6% annually.

Capital growth

Capital growth generally refers to the increase in the value of the amount of money you have invested.

Returns from capital growth can only be realised when you sell an investment for more than its purchase price.

The main benefit of capital growth is that it protects you against inflation. This occurs when the value of your investment grows at a rate faster than the general rise in the price of goods and services. By keeping your capital growth ahead of inflation you are able to prevent inflation from eroding the spending power of your savings.

Capital growth may occur through rising share and unit trust prices on the sharemarket, increased values in the property market and profit on fixed-interest securities if sold before maturity. In Australia, realised capital growth from investments is usually subject to capital gains tax.

Comparing risk and return

Setting realistic expectations is important when determining what level of return you might expect from your investment.

When evaluating the return on investments you may wish to compare their rate against the return on government bonds. This rate of return is often called the 'risk free rate'. An investment in government bonds is generally very secure as there is little chance that the lender (the government) would default and fail to repay the investment.

The risk free rate may be a good guide to use when considering whether the risk is commensurate with the reward of an investment.

You can generally find the government bond rate in the business section of the newspaper.

This article is based on the ASX Share Course. November 2008.