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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The science of getting rich - acting in a certain way

"You must give every man more in use value than he gives you in cash value."

We continue in our journey to look at the timeless advice contained in the book "Science of Getting Rich"  by Wallace D. Wattles.

This article is based on the chapter of the book where Mr Wattles teaches us to act in a certain way that will take us closer to our financial objectives.

Mr Wattles says that if your dreams are firmly impressed upon your mind, if you use your will power in the right way, if you have an attitude of gratitude, if you give to every person more than you take from them and you act in a certain way you will attract your dreams and the what you want to achieve will come to you.

You must not interpret his words as mere dreaming without no action. What he means is that you need your mind set in a way that will continually motivate you. The road to riches, financial independence or whatever it si that you want to achieve is not easy so you need to remain positive.

Those advices are followed by some concrete actions that you can take today that will take you further in your road to wealth. The first one is giving everyone more in use value than he gives you in cash value. This means that you are doing your very best to serve your customers and to deliver value to them. Your customers, which can be your employer, needs to have the impression of more use value than in cash value that he gives you.

I have used this advice and it worked wonders in my life and it continues to work. To find out more how this advice has literally changed my life  click here.

The nest advice is to act in a certain way that will take you closer to achieving your dreams. But exactly are you meant to act?

Do not bother as to whether yesterday’s work was well done or ill done, do today’s work well. Do not try to do tomorrow’s work now, there will be plenty of time to do that when you get to it.

Do not wait for a change of environment, before you act, get a change of environment by action. Cause your environment to change. You can so act upon the environment in which you are now, as to cause yourself to be transferred to a better environment.

Hold the vision of yourself in the right business, with the purpose to get into it and the faith that

you will get into it and are getting into it, but ACT in your present business. Use your present business

as the means of getting a better one, and use your present environment as the means of getting into a

better one. Your action, if performed in the certain way, will cause you to move toward the business.

Hold the vision of yourself in the job you want while you ACT with faith and purpose on the job

you have, and you will certainly move into a better job.

Do the best that you can do today, don't wait for tomorrow.

If you want to start investing in shares, do so today. If you to learn how to manage your finances, start today. If you in debt and want to get out of it, start today. Don't stay where you are, use your mind and will power to motivate you to move towards your dreams and act today in a way that will take you closer to your financial dreams.

Buying and selling shares

Buying and selling shares

The share market can be thought of in terms of its two main functions: The primary market where companies raise money by floating their company and selling shares to investors. Following this Initial Public Offering, the shares are then able to be traded on the share market (the secondary market).

So as an investor there are two distinct points at which you can purchase shares:

1. From the company itself in the very first instance of the shares being offered in the float.

2. Following the float, shares are bought from other investors via the share market. Shares can only be sold on the secondary market.

Buying shares in a float or Initial Public Offering

The word float is used when a company seeks to raise money by offering its shares to the public for the first time. The company must first submit details of its business and the proposed share issue to the Australian Securities and Investment Commission (ASIC) in a document called a prospectus.

Once the prospectus is lodged with ASIC, it is then available to potential investors for consideration. If you wish to buy shares in a float, you must first review the prospectus, fill in the attached application form, specifying the number of shares you want to buy, and send it with your payment to the company or lodge it with your adviser.

Lodging and/or registering a prospectus with ASIC and listing on the ASX does not guarantee the company will be successful once share trading begins.

Among other things, a prospectus is required to contain all the information that investors and their professional advisers would reasonably require to make an informed assessment.

When assessing a prospectus it may be useful to answer the following questions:

• Who – who is involved? (stockbrokers, underwriters, management, board, others)

• What - what is on offer? (growth, income-yielding, tax-effective or speculative shares)

• When - when does the issue take place? (bull/bear market)

• Why - why are they raising funds? (expansion, retire debt, sell down, takeover)

• How - how to participate in the issue? (public pool, firm share, entitlement, demutualisation)

If there is a great deal of investor interest in a new float, you may be allocated fewer shares than the number you applied for or none at all. With some floats, the initial share price (issue price) is not set until just prior to the first day of trading. You should obtain independent advice from a licensed professional adviser prior to making any final decision.

Following the float the shares are now listed on the share market. From this point shares can only be bought and sold on market through a stockbroker.

Buying and selling shares through a stockbroker

Establishing a relationship with a broker is easy. Each broker will have a slightly different process, but most require you to establish a client account. They may also need bank account details for the lodgement or receipt of trading proceeds.

When you place an order to buy or sell shares, you have a choice of two ways to tell your broker what price you will accept. You can place your order 'at market', meaning you will accept a price at or about the market price of the shares at the time you are placing your order.

Alternatively, you can place your order 'at limit', and inform your broker of the highest price you are prepared to pay or the lowest price at which you will sell. Orders where you set a 'trigger' point are known as conditional orders.

Determining entry and exit prices for shares is important. Investors are very capable of buying shares, however many fail to consider when to sell. Setting a target price to sell is an often overlooked skill.

When placing an order with your adviser, make sure you are fully informed and that your order is confirmed. Ask the current market price and write it down. Then tell your broker the details of your order (i.e. the amount of shares to be bought or sold and the price at limit or at market). They should then repeat the order back to you.

Internet based stockbroking websites provide confirmation screens for you to double check your order before it is processed.

Following a transaction on the share market you will be sent a contract note (confirmation). This outlines the details of your trade, including the number of shares and the amount paid or received for them.

Happy trading!

A few strategies to make some extra money

It is always a good idea to make some extra money. It can help you to pay off a debt, save or just buy something that you want.

This article outlines a few ways to generate some extra money. Depending on your commitment and goals, some of these strategies can be turned into significant streams of income.

Making Money on EBay
Think about all the stuff you have around you, do you really need all of that? It is likely that something you don't need anymore may be useful to someone else. There are several stories on the internet about people who have made a few bucks, hundreds or thousands of dollars.

All you need to do is take stock of what you have and sell anything that you don't need anymore.

Blogging

Blogging is a simple and quick way to start your own business. Over time, and with good and relevant content, you may build a loyal readership which may generate you some income through ads, affiliate marketing and other strategies.

It is also fun to be writing and exchanging ideas about a topic that you love.

EBooks

EBooks have the potential of generating significant income. Similarly to blogging, you can write an ebook on something that you are really interested, put it on the internet for sale and make some money.

Taking online surveys

Organisations all over the world need your opinion as a customer. They value your opinion so they can make various different decisions about the product, marketing and other aspects of their product management.

Your opinion is so important that they are willing to pay for it. You can find several online paid surveys. You can take a few each day and make some money from it.

Real estate investment

This strategy requires some start up cash in order to acquire an investment property. It is hard to get started, but once yo do you can make money from rental income and as your property value goes up you also make money.

Many people build a sizable property portfolio which generates passive income.

Invest in the stock market

Investing in the stock market is a common approach to generate income. As I have mentioned in previous posts, you need to learn before you start and you need to do a lot of research to ensure that you are investing in a good company.

You can also get stock market reports to help you to make your decisions. It is important to get the right advice, which can be of great help if you are a beginner investor.

I have recently blogged on the risks and benefits of investing in shares. For more information click here.

This short article is by no means exhaustive. The most important aspect of these strategies is to start. Do something about it , choose one strategy and get going, it may be the best decision you ever make.

The risks and benefits of investing in shares

The Risks of shares

Investors should be aware of risks with any type of investments. In order to receive a return for investing your money you need to accept a level of risk. Generally, the greater the risk the higher the return.

The following list is a summary of a few risks of investing in shares: 

• Risk of capital loss - Investors are able to redeem the value of their share investment by trading them on the share market. When a company is not doing well, it may be difficult to find a buyer to purchase the shares at the price you are asking. As a result, the sale price may be lower than the original purchase price. You incur a capital loss when the value of you share has gone down when comparing to the value of the same shares at the time of purchase.

•  Volatility risk - Share prices can rise and fall rapidly and investors must accept the fact that the value of their shares may fluctuate by as much as 50 per cent or more in a year. General market risk can relate to a particular sector, e.g. mining shares are usually more volatile than industrial shares such as bank shares. Specific risk can relate to the performance of an individual share.

• Timing risk - Because of market cycles, some shares have a higher degree of risk when the overall share market has risen sharply and is set for a reaction. The opposite may apply when the market has gone into a strong decline and then starts to recover after showing some signs of stabilising. Not all sectors of the market follow the same price cycles. Understanding business cycles and how different companies perform during the different phases of the business cycle can help to manage the effects of timing risk.

• The risk of poor quality advice - Are the investment recommendations made to you supported by a thoroughly argued case, or are they merely hearsay? The more reliable information you have, the better your decisions will be. Adopting a disciplined decision-making process will help you to minimise losses while you patiently build a portfolio.

The benefits of shares

• Shares for capital growth - Capital growth occurs when the value of your investment increases. Many people invest for capital growth to build their wealth and protect themselves against inflation.
  
  People invest in shares because they offer the possibility that their price will rise. Owning shares in a company with a rising share price is one way to achieve capital growth.
  
  Capital growth is essential to investors as long as there is inflation. Inflation is a measure of the rise in the price of goods. The Reserve Bank of Australia (RBA) aims to keep inflation within a range of 2-3%. With no capital growth, your money will buy less in the future than it does now.

• Shares for dividend income - A dividend is the distribution of a company's net profit to shareholders. Dividend yields vary greatly from company to company. It is not compulsory for a company to pay a dividend.
  
  For Australian investors, dividends are often worth more than the cash payment they receive. This is because a company can also distribute franking credits for any company tax it has paid.
  
  Franked dividends carry imputation credits, which entitle shareholders to a tax offset or a reduction in the amount of tax to be paid. If your marginal rate of tax is lower than the company tax rate, the excess franking rebate can be used to reduce the tax payable on other sources of income.
  
  In addition to rising share prices, dividend re-investment plans (DRP) can multiply the capital growth effect of a share investment. DRP is an alternative to cash dividends, allowing shareholders to purchase new shares instead of receiving a cash dividend. These shares are often issued at a discount to the current market price and no brokerage is paid.

• Capital gains tax (CGT) - Shares enjoy good taxation benefits in comparison to most other investments. You realise a capital gain whenever you sell shares and the consideration received (sale price less related costs such as brokerage) is more than the cost base (purchase price plus related costs).
  
  If the shares were acquired on or after 20 September 1985, the capital gain must be included as assessable income in your tax return and is subject to CGT. CGT is payable at your marginal tax rate in the year in which you sell the shares.
  
  For shares acquired on or after 21 September 1999 and sold 12 months or more after the date of acquisition, capital gains may be discounted by 50%; meaning only half of the capital gains must be included in your assessable income.

• Financial control - Shares' flexibility and liquidity are key advantages. In particular, the ease and low cost involved in buying and selling relatively small amounts and the control that gives you; whether to free up some cash, re balance your portfolio or simply realise a profit.
  
  Many people appreciate how easy it is to invest in shares. There is no conveyancing cost, stamp duty or ongoing expenses. You can do everything over the internet if you wish, and brokerage fees are much lower than typical real estate agent fees. So you can start small, buying companies you know, and take the time to learn as you go.

 

Please note that this is an Australian website. Laws and regulations will differ in different countries. It is of vital importance that you check your tax laws before investing in shares.

This article is based on the ASX share course, version 3 2008, course 3. (http://www.asx.com.au).