BASSETERRE, St. Kitts – ‘Stocks’ is a word that is commonly used in the business world, but outside of that world, most ordinary individuals, while they may be familiar with the term, do not understand what it is.
SKNVibes sat down with the General Manager of the Eastern Caribbean Securities Exchange (ECSE), Trevor Blake, and discussed some frequently asked questions about stocks as well as the ECSE.
We can now share with you the answers to some of the questions asked:
What are stocks and are they the same as shares?
When one refers to stocks, they also refer to shares. Stocks and shares are the same thing. Stocks/Shares are the representation of an ownership’s stake in a company. A company is owned by its members and what represent the ownership stake are the shares that those members hold in the company.
What determines the amount of stocks/shares a company has?
A company can have any amount of shares. It depends on what the organisers of the company want to achieve. The value of the company and the price of the shares determine the number of shares.
Example: You can have a company that only has 100 shares and it is worth $100, and you can have a company that is worth the same $100 but only has 20 shares. So for the company that has the 100 shares, that would mean that each of those shares is worth $1, but for the company that is worth the $100 but only has 20 shares, it would mean that each of those shares is worth $5.
Why would a company sell shares?
A company sells shares to raise capital. For a company to operate it would need capital, maybe to buy assets for the business or to carry on its business – whatever the company needs to do, it will need capital to do it.
The capital is the money that the shareholders put into the business.
There are two basic ways of financing a company. Either through debt, that is borrowing the money from a financial institution, or by raising capital, which is by equity, that is getting people to buy shares in the company and injecting capital by that means.
What is the process that companies go through to sell shares?
A company may sell shares in a number of scenarios. A private company (i.e. a company that is owned by a few people – less than 50), in order to get investors would have to do what is called an Initial Public Offering (IPO).
An IPO is the means by which they go to the public to raise new capital.
To undertake an IPO in order to raise capital the company would issue a prospectus. That prospectus would set out all of the details of the company – the existing shareholders, directors, managers, what the company does, the financial condition, the value of the existing shares etc.
One of the things that would have to be done is a valuation. Either a Broker Dealer or in some cases an Accountant, would develop that valuation and come up with an indicative price of what the company is worth and at what price each share may be sold at.
The prospectus would then be published in the media.
A private company would have to first become a public company in order to sell shares.
A public company which already has existing shares would not have to do an IPO. It would do an Additional Public Offer (ADO) which is also the means by which it goes to the public to raise new capital.
What is the difference between a public and a private company?
A public company is one that has a wide cross section of shareholders, or one whose shares are available to the public for subscription.
A private company is one that is more closely held with just a few people. Those few people would have to be less than 50 because according to the Company’s Act in St. Kitts, once there are more than 50 shareholders in a company it is deemed to be a public company.
How would an individual go about purchasing shares?
In the case of a new issue of shares, the prospectus would set out the mechanism for applying for those shares in an IPO. For shares that are already in existence, and are listed on the ECSE, for an individual to buy those shares, they would have to see a Broker Dealer who would then put a buy order on the market.
How would an individual go about selling shares that they previously bought?
If an individual wants to sell their shares they would go to a broker/dealer and explain that they have shares that they want sold. The broker/dealer would then take the sell order and put it on the market.
An individual may sell their shares for any amount of money but the broker/dealer has a duty to advise that person of a reasonable price.
What does a broker/dealer do?
Limited service brokers are authorised to handle all functions necessary for securities trading including funds collection, securities ownership verification, order placement, settlement for securities transactions.
They facilitate transactions for the investor but are not allowed to hold money on behalf of the investor, except for settling transactions. Limited service brokers charge fees for their services.
In addition to the service provided by limited service brokers, broker/dealers offer other financial services to investors and issuers for a fee. These services include studying market fluctuations, evaluating new products, helping companies to go public, conducting trading services, providing investment advice, keeping records of clients’ holdings, setting up and maintaining accounts for clients, assisting issuers in determining the best method/time to issue securities.
What is a dividend?
A dividend is a periodic income payment made to shareholders from the profits of a company. Dividends are not fixed or guaranteed.
What are the benefits of owning stocks?
There are many benefits to owning stocks. Stocks may increase in value. This is known as capital appreciation (gains). Owners of stocks may receive dividends and owners may also contribute to the development of the region’s companies.
What are the risks involved in owning stocks?
There is an element of risk in every investment. Although historically stocks have increased in value, there is always the risk that their value may decrease. This depends on the performance of the company, economic conditions, and how investors perceive the company. In general, while stocks may fluctuate in value over time, they intend to perform well relative to other financial products.
What are the differences between stocks and bonds?
Stocks give holders part ownership in a company, whereas bonds represent a loan to the company. Shareholders are owners and bondholders are lenders.
Shareholders can have a say in the company’s operations while bondholders cannot. Shareholders can collect dividends based on the company’s profits and the number of shares they own in it. Bondholders can collect interest payments on specific dates until the original amount loaned is repaid.
(More on Understanding Stocks and what a Security Exchange does - in Part II of this article)
