What Are Shares? Definition, Types of Shares and How to Invest?

January 6, 2023
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Introduction:

Shares could be an important investment for your financial portfolio. Owning stocks like Facebook, GTBank, Dangote Group, MTN, Nigerian banks, or Coca-Cola may help you increase your savings, protect your money from inflation and taxes, and maximise your investment return. It is also important to understand that stock investment has risks. Therefore, this article explains what shares are and how to buy shares in Nigeria. So, keep reading to understand your strategies with shares. 

Understanding What Are Shares and Who is a Shareholder?

The capital of a firm is split up into equal units of a finite number which are known as shares. A share, to put it simply, is a portion of ownership in a business or a financial asset. 

Shareholders are investors who possess the shares of a corporation. For instance, if a firm has a market capitalization of 10 lakhs Naira and each share is valued at 10 Naira, then there will be 1 lakh shares issued.

Different Types of Shares:

1. Preference shares

This sort of share grants some preferential rights over other share types. Preference shareholders' principal advantages are:

  • When it comes to receiving a dividend, or a portion of the company's profits, they are given first consideration.
  • Preference shareholders have priority in receiving payment in the event of company closure.

Preference shares come in three sub-types:

Cumulative preference shares: Before any dividend is paid to equity shareholders, cumulative stockholders have the right to receive arrears. For instance, if the company is still due to pay the dividends on preference shares for the last two years to the shareholders, then cumulative preferred shareholders would be entitled to collect dividends for all prior years in addition to the current one.

Non-cumulative preference shares: No dividend is payable to non-cumulative shareholders for the prior years. These investors only receive a dividend when the business is profitable. 

Convertible preference shares: Shareholders who are convertible may change their preference shares into equity shares at a later date. However, the company's articles of association must permit the conversion of shares.

2. Equity shares

Ordinary shares are another name for equity shares. Equity shares make up the majority of the company's issued shares. The secondary or stock market sees active trading of this kind of share. These stockholders are eligible to vote at corporate meetings. Additionally, they have a right to receive any dividends declared by the board of directors. The dividend paid on these shares, however, is not a fixed amount and could change annually depending on the company's profitability. Dividends are paid to equity shareholders, following those to preference shareholders.

3. Differential Voting Right (DVR) shares

Shareholders of DVRs have fewer voting rights than equity shareholders. Companies give additional dividends to DVR shareholders to decrease voting rights. DVR shares are less expensive because they have fewer voting rights. Equity shares and DVR shares are almost 30-40% apart in price.

How to Acquire Shares in a Company?

The following is a step-by-step guide on how to purchase shares in Nigeria:

1. Create a brokerage account in Nigeria

2. Finish the account opening form for the Central Securities Clearing Systems (CSCS).

3. Add money to your trading account

4. When you have decided what you want, submit a trade offer.

As a beginner, you should try to maximise your resources. Trading stocks may be a rollercoaster journey. When the stock price rises and you can see that your investment is profitable, you may feel really happy at first. But there is an equally high chance of stock prices falling. So, invest with caution.

Understanding the risks associated with the stock market is essential. It's wise to diversify your portfolio, as a bit of advice. This implies that you purchase stock in several businesses and industries rather than placing all of your eggs in one basket. It is one way to balance risk and reward. 

A portfolio, for instance, with a 49% domestic stock allocation, a 21% international stock allocation, a 25% bond allocation, and a 5% short-term investment allocation would have produced average annual returns of about 9% over the same time period, albeit with a narrower range of extremes on the high and low end.

Additionally, before purchasing a stock, you must conduct in-depth research on it with the aid of your stock broker.

Rights and Liabilities Attached With a Share:

1. Appointment of directors

Through the adoption of an ordinary resolution, shareholders have a direct say in the appointment of several kinds of directors. In addition to this, a shareholder may object to any resolution adopted at the general body meeting for the nomination of a director. The Companies Act of 2013's regulations permits shareholders to file a lawsuit against the director.

2. Right to appoint the company auditors

The initial auditor of the Company shall be appointed by the Board of Directors. Additionally, the shareholders' meeting at the annual general body is recommended by the audit committee and board of directors. 

3. Voting rights

Shareholders are welcome to attend and participate in the annual general body meeting. Every corporation is required to hold at least one annual general meeting. During the meeting, the adoption of the financial accounts, the appointment or confirmation of the directors and auditors, and other required agenda items are discussed.

4. Right to call for general meetings

A general meeting may be called by shareholders. If general body meetings are not conducted by the law, they may also turn to the Company Law Board for assistance.

5. Right to inspect registers and books

Since shareholders are a company's main stakeholders, they have the right to view the books and accounts of the business and, if they so want, to request information about them.

6. Right to get copies of financial statements

The right to get financial statement copies is held by shareholders. The corporation has a responsibility to send its financial statements, whether in a quarterly or yearly statement, to every shareholder.

7. Winding up of the company

Before the company is dissolved, all of the shareholders must be informed of the situation, and full credit must be provided to all of the stockholders.

Is It Worth Investing in Shares in Nigeria? 

It is worthwhile to purchase or invest in shares in Nigeria due to its several advantages, which are detailed below:

  • In general, shares perform better over the long term than cash or fixed-income securities like bonds. Stocks are priced differently, though. Investors may decide to adopt a long-term perspective for their stock portfolio because stock market movements tend to lose their impact with time.
  • Taxes and inflation could reduce your wealth. Investors may benefit from favourable long-term tax treatment by purchasing equities, which can lessen the negative effects of these two factors.
  • Some businesses give their shareholders dividends or other types of special distributions so they can earn more money from their investments over time. Additionally, Nigerian stocks have a favourable tax status that allows their owners to keep a higher portion of their profits.
  • Prices for stocks fluctuate over time. When a stock's price increases, investors may decide to sell it for a profit.
  • Many businesses provide their owner's dividends, which could be a tax-efficient source of income.
  • The right to vote gives a shareholder some control over how the board of directors and company management are chosen.
  • Common stocks typically see more trading activity than other investment kinds like real estate, works of art, or jewellery. Investors can thus easily buy or sell them for cash.
  • Dividend and capital gain income is taxed at a lower rate than wage and bond interest income.

Different Ways to Buy Stocks:

1. Buy Stocks Online:

Online stock trading is cheap, but there is little to no direction and there is simply a fixed price per transaction. It is the most time-consuming alternative because you would have to do all the work yourself and be  in charge of making investment selections. Before you begin, it is a good idea to study the top trading websites online.

2. Mutual Funds:

A little bit safer than individual stocks is investing in mutual funds. Here, your fund manager handles the grunt work and buys a selection of equities on your behalf. You hold a share of the fund even though you don't own the stock.

3. Hedge Funds:

A mutual fund and a hedge fund are comparable. Both funds combine all the money from their investors into a single actively managed fund. The distinction is that hedge funds engage in intricate financial products like derivatives with the expectation that these superior assets will outperform the market. Due to their private ownership, these funds are less regulated than mutual funds. Despite being riskier, they are thought to produce a larger return.

Difference Between Stocks and Shares:

HTML Table

Company Contact Country
Particulars Shares Stocks
Definition A financial instrument that represents partial ownership of a company A bundle of shares (from one or multiple organisations) is known as stocks
Nominal Value Yes No
Possibility of Original Issue Zero possibility There is a possibility
Paid-up Value The shares of a company are either fully paid up or partially paid up The stocks of a company (or a group of companies) are always fully paid up
Scope A narrower scope when compared to stocks A wider scope when compared to shares.

Frequently Asked Questions:

Can shares make you rich in a short time?

Shares are a relatively high-risk investment. They can help build your wealth when you understand how to manage it effectively. 

Do you get monthly income from shares?

If shares are managed effectively and regular trading is done by a person, shares or a good source of monthly income. However, it is suggested to conduct background research on share management before investing their money.

Is an online broker service necessary to buy shares and stocks?

Yes, and online broking services are necessary to buy shares and stocks. They help you open a trading account through which you can buy and sell your shares and stocks.

Are shares an asset?

Yes, shares are an asset to an individual because a person is obliged to invest money in the same in the anticipation of an appreciation or depreciation in the value of shares.

Are shares taxable?

Yes, the income generated from shares is taxable under different conditions based on incurring a short-term profit or a long-term profit.

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