Basseterre, St. Kitts - Buying company shares is one of the many ways of investing your money. It is one of the most rewarding but also one of the most challenging and risky types of investing. This article discusses some important information about investing in shares, and suggests some basic rules and safety checks that should be known and applied when investing in shares.
You can profit from an investment in shares in two ways: (1) Capital gain – this is the profit you make when you buy a company’s shares at a lower price and then sell them at a higher price, also called capital growth; and (2) dividends (cash flows) – this is the portion of a company’s profit that is distributed to its shareholders whenever the company performs well enough and has sufficient profit.
Shares can be purchased from a company when it issues new units (primary market investment) or from existing shareholders who wish to sell (secondary market). In the OECS, the Eastern Caribbean Securities Exchange (ECSE) operates the market on which shares in public companies are listed and traded. A network of nine ECSE member broker-dealers, including National Bank (SKNANB) in St. Kitts and The bank of Nevis, is available to help investors with advice and services in the purchase of shares that are listed on the ECSE.
Listed shares offer investors benefits that are not available to owners of unlisted shares. First, there is Fair valuation – the share price of a company’s shares is determined in a market ruled by demand and supply. Therefore, the share price is a fair price. Second, there is Liquidity – listed shares are quicker to buy and sell as the market is open to everyone. And third, there is the enhanced legal environment – where the very strict listing requirements stipulated in law, means that listed companies are generally of a high caliber and closely observed for any wrong doing.
Companies sell their shares in order to raise capital. They use the money received from selling these shares to develop and grow their business. This is another way, other than obtaining a loan, for a business to expand. This process is also known as primary trading. If a company is listing its shares on the (ECSE) to make them available to the public at the same time as it issues new shares to investors, this process of selling the shares is known as an Initial Public Offering (IPO).
By listing its shares on the ECSE, a company gains public awareness and its brand becomes better known. This makes new investors aware of the company and its performance, and as they become more familiar with it, they will be more inclined to invest in the company.
Presently, there are thirteen companies whose shares are listed on the ECSE. Five of these are from St. Kitts and Nevis, one from Trinidad, one from Barbados and the remaining six from other OECS countries. To buy shares in these companies, you will have to visit a broker-dealer, such as National Bank or the Bank of Nevis, open an account and give them your orders so they can make the purchase on the ECSE on your behalf. You can open an account and start investing in shares with as little as $20.
Many persons may have acquired their shares through inheritance from relatives or may have received shares from the company as part of a remuneration or bonus package. Such persons would not have made the initial investment decision and may not have, themselves, put out the money to buy the shares they now own; however, as long as they own the shares, if the company makes profit and declares a dividend, these persons would experience the benefits through receipt of dividends.
Let’s recall what a company share is. If you buy a company’s shares, you have actually bought a portion of that company. Your investment is only a part of the total investments that all persons have together made in the company. A person who owns one or more shares is called a shareholder and each such person is a part owner of the company. The shares you bought represent your ownership rights and whenever you increase your shares owned, you also increase the rights you hold in the company. In this way, if you own 5% of the total shares that a company has sold to investors, your ownership right in the company is 5%. In this example, you are entitled to receive 5% of the total profits of the company that is distributed to its shareholders. Each share owned in the company gives you the right to receive company information, to attend Annual General Meetings and the right to vote on decisions affecting the company.
Though rewarding, investment in shares is risky, in that if a company fails, there is no one to whom shareholders can lay claim for repayment of the monies with which they bought the shares; they would have suffered a loss. In addition, shareholders will only receive dividend if a company’s board of directors declare that the company has performed well and has made enough profit to distribute to its shareholders. If the opposite is true in any year, no dividend will be received. Thus, investing in shares is regarded as a long term effort that can reward the patient investor with earnings that recuperate the initial investment and brings benefit from the dividend cash flows.
The price that an investor pays for a share is called the share price. Much like with physical commodities, the share price is the price at which a particular share can be bought or sold.
The main factors affecting the share price is the supply and demand for that particular company’s shares. When there are more buyers than sellers, the share price will usually rise because these shares are in demand. On the other hand, whenever there are more sellers than buyers for a particular company’s shares, the share price usually falls because there are more of these shares available and sellers may be forced to lower their asking price in order to achieve the sale.
The level of profits of a company can also influence its share price, as investors will usually be prepared to pay higher prices for shares in companies with stronger performance. If a company is very profitable, a share in that company will become more valuable because more people think that it is a good investment. This will therefore lead to increased demand while, at the same time, current shareholders may be less eager to sell, thereby causing reduced supply.
In addition, factors such as economic and political events affecting the sector, the industry and type of business of a company can also influence share prices. All of this means that, even after you have invested and own shares, the share price can continue to rise and fall, thereby increasing and decreasing the value of your investments – a process over which you have no control.
Remember, if you sell your shares at a time when the share price is higher than that which you paid for it, then you would have earned capital growth, also called capital gain. Thus, earnings from investments in shares can be through dividends, and also through capital gains.
It is important to select the “right” company in which to invest. Not all company shares may be suitable investment opportunities for everyone. Even where you may be familiar with a company’s products and services, it is still important to ask questions about that company’s shares. For example, has the company been paying dividends in recent years; who are the majority shareholders; have they published financial statements; have they held annual general meetings of shareholders; is the CEO new, experienced, reputable; has the management team been stable in the recent past?
When deciding to invest in shares, determine how long you are prepared to wait for a return on the investment and whether you can be patient – for some companies the wait can be longer than others. Be mindful that companies will be at different stages in the business life cycle and that, for example, a new company may hold great prospects but be unable to pay dividends for the moment. Be aware of the plans and current performance of the companies in which you are interested; if a share does not perform as projected, you may need to review your strategy and perhaps sell those shares in order to reinvest in others. This process is easier than it sounds, especially if you seek assistance from an ECSE member broker-dealer. The broker can also provide professional advice to help you set realistic investment goals and define investment objectives to which you can remain committed over the long run.
In any event, you should keep abreast with information on the market for the shares through regular visits to the ECSE’s website, reading of financial literature, attending investment courses and seeking a qualified expert’s (like an ECSE member broker-dealer’s) advice. This will enable you to make informed decisions on which companies to invest in.
There are risks involved in investing in shares. You should first determine how much risk you can and want to take on, how much return (profit) you expect and which company’s performance meet your needs. Risk, means the real possibility of losing part or all of your initial money used to buy the shares or the likelihood of making a profit that is less than what you expected. Usually, the more risky an investment is, the higher the rate of return desired from it. Higher return is demanded to compensate for higher risk.
Taking some examples: Cash in a saving or deposit account in a bank or credit union or money market account that earns pre-determined interest, is a low risk investment; Government bonds and Treasury Bills, interest-paying debt instruments issued by the government with a specified redemption date of 91 days or several years after issuance, are low risk instruments. Compared with these, corporate debt and shares issued by companies are of greater risk, since the possibility of companies going bankrupt is a real and basic question-mark over whether you will receive profits. In addition, the share prices rise and fall all the time as economic and market forces change and the company’s performance vary. It is worth remembering that investing in shares normally does not make you rich overnight, but that it should be treated as a long term undertaking.
You can minimize your investment risk by diversifying your shareholdings among various companies. To ‘diversify’ means to invest in a number of companies from different industries. Simply put, you should avoid placing all your ‘eggs’ in one ‘basket’. Where one company’s share price or profits doesn’t perform well, you can still benefit when your other company’s share price or profits does well. Consider choosing your investments from a variety of sectors and companies and countries within the OECS. This is a main benefit of the ECSE – it gives citizens of the EC currency countries the enviable opportunity, without restrictions, to invest in shares issued by companies from across the region.
Also, be sure to use the right “class” of funds when you decide to invest in shares. It is advisable that you should only invest with money that you do not need in the short run and can “afford to lose”, i.e. your disposable income after all your day to day needs have been taken care of. To do otherwise is to risk not having money to pay rent, eat bread and proper meals, or care for your children.
The point here is that although investing in shares allows you to make a good profit, you should also be aware of the risk of losing money in the short run. Companies with strong performance history are most attractive and will yield warm dividends, but the caution that investments in shares are for the long run, cannot be overemphasized.
Again, to help you with this decision consider regularly visiting the ECSE’s website www.ecseonline.com, reading financial literature, attending investment courses and seeking the advice of a qualified ECSE member broker dealer.
