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| Stocks
and Shares |
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When
you buy stocks or ordinary shares, you own part
of the company and have the right to vote at general
meetings. Each share is a small stake in a company and
you can buy small or large number of lots depending
on the amount of money you have.
As
a shareholder, you can benefit from the profits earned
by the company |
in
the form of dividends paid to you, and also from the growth
in the value of the company.
But why do companies issue shares? The company benefits by raising
funds to operate and expand its business without having to borrow
the money from other sources such as banks.
You should be aware that there are risks associated with buying
shares. When the company performs poorly, its shares may fall
in value and you may not receive any dividend. There are other
factors such as the performance of the stock market as a whole
and the country's economic situation that may affect the price
of your shares. It is also possible that you may lose your entire
investment if the company goes out of business. There are also
shares that are difficult to sell if the demand for them is
lacking. It is therefore important that you select the right
companies to invest in.
Financial advisers will generally recommend shares as part of
an investment portfolio. The aim in trading shares is of course
to buy at a low and sell at a high price. For long-term investors,
it is important to select shares based on fundamentals, which
means investors need to be knowledgeable about the companies
in which they plan to invest their savings. It is therefore
important that you read and understand the prospectuses, financial
reports and corporate announcements, which listed companies
are required to issue to the shareholders and the investing
public.
In selecting shares, you should examine factors such as the
background of the company and its management, its financial
strength, price-earning ratio and dividend yield, its earning
growth prospect and competitive edge. A wise investor checks
out these factors which may affect the price of a stock before
putting in his money.
There are also two other types of share issues an investor will
come across in trading shares, and they are bonus and rights
issues. A bonus issue is the issue of new ordinary shares at
no cost to existing shareholders but out of the company's reserves
and in direct proportion to their existing shareholding in the
company. Bonus issues are used to enlarge the capital base of
the company and may also be used as a means of rewarding its
existing shareholders. To be entitled to the bonus share, take
note of the Ex-Date as only shares bought before the
Ex-Date will be entitled to the bonus share.
The period from the day of announcement of the entitlement of
bonus or rights issue or dividend to the day before the Ex-Date
is commonly referred to as the cum-period. Normally, Cum is
a prefix meaning "with." A share that is cum-dividend
means the buyer is entitled to a dividend currently attached
to it. The same is true for cum-rights and cum-bonus.
A rights issue gives the existing shareholders the right to
subscribe for new ordinary shares at an issue price lower than
the prevailing market price and at a ratio equivalent to their
existing shareholding. Companies carry out a rights issue when
they want to raise additional funds to finance their capital
requirements.
In offering a rights issue, the company sends out a provisional
allotment letter (PAL) to all existing shareholders informing
them of the rights issue entitlement. Shareholders are required
to follow all the instructions given in the PAL in subscribing
their rights for the new shares. If you choose not to exercise
your right, remember that the PAL can be sold to the open market
(if quoted) or the entitlement can be renounced to someone else.
Often, you will see a category of 'A' Shares listed in the newspapers
and investment magazines. The listing of 'A' shares refer to
the issue of shares not qualified to entitlements, such as dividends,
bonus and rights issues. These shares will later merge with
the existing shares after the entitlement date. |
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