If you’re someone of a certain age, the very mention of trading stocks/shares brings back memories of 80’s traders in their pin striped suits smoking £20 notes and driving around in Porsches after making a million pounds on a Monday morning. Sadly, those days are gone… (I’m more of a Lamborghini man anyway) but that doesn’t mean you can’t make some amazing returns on your investment if you choose wisely. First things first though – let’s get back to basics and understand what you’re actually getting when you make an investment.
Companies divide their capital into units called shares. When you buy a share, you gain part ownership of that company and there are four main types of shares available:
Ordinary shares are the standard and have no special rights or restrictions. These have the potential to give the highest financial gains, but also have the highest risk. Ordinary shareholders are the last to be paid if the company goes bankrupt.
Preference shares typically carry a right that gives the holder preferential treatment when annual dividends are distributed to shareholders. Shares in this category receive a fixed dividend, which means that a shareholder would not benefit from an increase in the business’ profits. However, usually they have rights to their dividend ahead of ordinary shareholders if the business is in trouble. Also, where a business is wound up, they are likely to be repaid the par or nominal value of shares ahead of ordinary shareholders.
Cumulative preference shares give holders the right that, if a dividend cannot be paid one year, it will be carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the business, provided the company has distributable profits.
Redeemable shares come with an agreement that the company can buy them back at a future date – this can be at a fixed date or at the choice of the business. A company cannot issue only redeemable shares.
As a shareholder, unless otherwise specified at the time of purchase – you would normally be allowed a right to vote in certain circumstances on the running of the company, including in the appointment of directors who will manage the business of the company. You’ll could also be paid a dividend from the company profits. Investors look to make money quickly by buying shares at a low value and selling them again when the price is good, however unless you’re a serious investor with your finger constantly on the stock market pulse, it’s more likely you’re going to purchase shares and stick with them for a number of years as they slowly mature.
Remember though, shares can go up or down and so a great way to balance your risk is to choose a range of shares from companies of different sizes, in different industries and even in different parts of the world. That might sound like a complicated strategy but it’s something an Independent Financial Adviser is more than qualified to help you with.
Here at Credius we’ve got the experience and professionalism to help you make the most suitable choices. So pick up the phone and speak to a financial adviser today on 020 7562 5858. We’d love to hear from you.