Shares are securities created by joint-stock companies with no established circulation period and giving the right to joint ownership (management) of the enterprise and to receive income as dividends, as well as to the share of property left after liquidation measures.
Dividends are
a share of the net income of a joint-stock company, it is distributed among the owners of shares (shareholders) in proportion to the number of shares available.
Types of shares
These securities are divided into simple (ordinary) or preferred.
An ordinary share is a paper that gives the right to own the own property of the issuing enterprise. Their holders can choose persons on the board of directors and act on key issues, take part in the regulation of the organization's income (as dividends).
Preferred shares are documents that provide the right to certain privileges in comparison with the owner of ordinary shares. Privileges can be in the form of receiving stable dividends of the established sizes, as well as in the form of a pre-emptive right to receive the remains of the property of the organization during liquidation. However, privileged owners, in exchange for these rights, are usually deprived of a vote at a stock meeting. But at the same time, in the case of non-payment of dividends, and this is stated in the Charter of the enterprise, preference shares give their owners the right to vote until dividends are paid.
Additional rights of shareholders
In addition, there are additional rights to an ordinary share in the form of their primary acquisition in a new issue. But again, it depends on the charter of society. Consequently, there are many different types of similar securities with one company, which have differences in the complex of rights for their holders.
It should be noted that the shareholder is entitled to receive dividends, but the issuer does not guarantee a mandatory and regular payment of them. Dividends on ordinary shares, as well as on preferred ones, are often not paid when the payables are not fulfilled, there are losses, or when the payment of dividends can cause losses themselves.
Categories of ordinary shares
There are 6 investment types of common shares:
• "Blue Chips" - popular and especially attractive securities. Elite organizations that are in this category, in the usual way, pay dividends for a long time and in good and bad periods.
• Growth stocks are those that have an excellent opportunity to increase profits in the future. The profit of the organization is invested in the future development of the production process, and the shareholders are paid either small amounts of dividends or no payment at all. The price of such shares is extremely volatile and often fluctuates faster than the prices of other securities.
• Income shares are those in which current account profits compete with fixed income. They are usually with a longer history than other securities, and with stable dividend payments (above average size).
• Cyclic stocks are securities of companies whose income depends on the business cycle. In the presence of favorable conditions, the income and rate of securities grow rapidly. And vice versa, if the business environment is getting worse, then profits and exchange rates, respectively, are steadily going down.
• Speculative (risky) securities usually come in new issues and with a fairly changing ratio of market prices to earnings per share. They do not have constant success in the market, but they are characterized by the potential for a significant increase in rates. Such shares are those issued by small enterprises in developing industries, as well as securities that are too cheap.
• Defensive (protected) stocks are those that are stable and safe in floating markets. Their cost is quite stable and decreases least of all with a tendency to decrease in the rate. Basically, such papers are issued by food, pharmaceutical and utilities organizations for the production of cost-effective products.
Differences of bonds from ordinary shares
Bonds and ordinary shares have the following differences:
• Bonds may be issued by any commercial enterprise or state. An ordinary share is that security which is created exclusively by joint-stock companies.
• The value of the bond can not fall below the original, and stocks may be cheaper.
• The interest on bonds is often fixed , and the amount of dividends on ordinary shares often changes significantly (or is not paid at all), this depends on the income of the organization.
• Payment of interest on bonds is carried out over a specified period (it is specified in the contract), while shares generate income for an unlimited period.
• The yield on bonds is less compared to stocks, but the probability of its receipt is high.
• Interest on bonds is a priority right, that is, they are paid before dividends. Interest is paid by the issuer regardless of the result of economic activity. The lack of profit will not entail any consequences for the organization regarding dividend payments, and the lack of financial resources to pay interest on bonds forces the organization to sell part of the property or take out a loan to pay debts.
• Bonds do not give the right to manage the enterprise. The shareholder is one of the owners of the organization, and when buying a bond, the owner becomes a creditor.
• In case of liquidation of an enterprise during the division of property, shareholders receive only the share that remains after payment of all debt obligations, including bonds.
What to choose?
A bond and an ordinary share are almost the opposite in matters of making a profit. Everyone who wants to purchase these types of securities should conduct a clear analysis of what he still wants to get in the end result.
Ordinary Share Price
Buyers of ordinary shares are interested in their value.
When securities are placed on the market, the owner of the organization sets the share price. Its value consists of a complex of nominal prices and dividends. Since it is impossible to make a forecast for the development of the issuing organization for an indefinite period, it is impossible to establish their price for a future period. Consequently, the value of ordinary shares is the same price that was determined for a specific time period, and it can vary from 5 rubles to several hundred or more, depending on the success of the enterprise.
Advantageous acquisition of a block of shares on exchanges (including trading floors) can entail tangible profit for the investor. But there is a certain risk: there is no guarantee of a stable income. Different facts can influence the value of such securities: economic instability in the state, exchange rate volatility, decrease or increase in demand for certain goods and services, change of social and pro-government management.
Dividends on ordinary shares
An ordinary share is such a security that gives the holder the right to take part in managing the organization at a stock meeting and in the distribution of income. Dividends are paid taking into account the size of the profit of the issuing organization. The size of the dividend on ordinary shares is calculated by the board of directors and then ratified at the stock meeting. Holders at the meeting have the right to reduce their size. This type of shares is a rather risky investment process, since in the event of liquidation of the organization, shareholders will receive money only after all payments to creditors and preferred owners are made.
Profit categories
The joint-stock company informs about the profit that falls on one share in the following indicators:
• basic earnings per ordinary share, showing the share in the reporting period for shareholders;
• profit (loss) on a security showing a probable decrease in the level of basic earnings per share in a future reporting period (diluted profit).
Formula for calculating profits: net profit equals the division of dividends on preferred securities by the number of ordinary shares outstanding.