BASICS(1) : WHAT ARE STOCKS AND SHARES?
Stocks and shares are generally just referred to at once as if both are twins or mean the same thing. They are quite different financial instruments. One is proof or certificate of part ownership of a limited liability company (Shares) while the other is proof or certificate of indebtedness of a company or government (Stocks).
When it comes to Shares, the key to full understanding lies with appreciation of what it means for a company to be limited. A limited liability company is one in which the risk owners' bear is directly related to how much of the company they own. If a certificate indicates that you own N100 in a one million Naira, you stand to share in profit and loss of the company only to the extent your N100 exposes you and no more.
Unlike limited liability companies, those who go into unlimited partnership or prefer to own their own enterprises stand to lose everything should the business fail. Of course, they also take all the profit if it succeeds. The real issue with such investments is that if at the time of dissolution, the company owes more than its assets can pay, you the unlimited owner, will be expected to make up the difference from your other personal assets.
So, the concept of limited liability became a reality because the majority prefer to limit their exposure to risks and losses. It also makes it easier for people to be part owner of companies without having to be involved in day to day running and decision making. Instead, their money works for them and in the end, armed with their shares, they participate in profit and loss every year.
On the other hand, stocks are also called bonds and are issued by governments and companies to borrow money from the public. In most of them, the interest to be paid and when, is clearly stated in addition to when the full amount will be redeemed.
Stocks can be redeemable or convertible. Convertibles stocks are the ones that could be converted into shares representing part ownership when due for payment while redeemable ones of course, are to be repaid when due,
Shares can also be issued as preference and ordinary shares. Preference shares are issued, as the name suggests, to attract investors who want to share in the year's profit but do not want to bear the full risk of ownership. They are then given preference when dividend is to be paid but only to clearly stated percentage and ordinary shareholders are then free to partake of what remains.
In recent years, preference shares have not been that popular and in fact, given the guaranteed rates and repayment in bonds or stocks preference lose attraction even in troubled times.
THUS:
* Tomorrow, we will briefly go through why people invest in stocks and shares.
* Meanwhile, post any questions you want answered or issues you want treated in this series as part of your comments.
* Let us make it a date tomorrow, Wednesday, October 14, 2015.
When it comes to Shares, the key to full understanding lies with appreciation of what it means for a company to be limited. A limited liability company is one in which the risk owners' bear is directly related to how much of the company they own. If a certificate indicates that you own N100 in a one million Naira, you stand to share in profit and loss of the company only to the extent your N100 exposes you and no more.
Unlike limited liability companies, those who go into unlimited partnership or prefer to own their own enterprises stand to lose everything should the business fail. Of course, they also take all the profit if it succeeds. The real issue with such investments is that if at the time of dissolution, the company owes more than its assets can pay, you the unlimited owner, will be expected to make up the difference from your other personal assets.
So, the concept of limited liability became a reality because the majority prefer to limit their exposure to risks and losses. It also makes it easier for people to be part owner of companies without having to be involved in day to day running and decision making. Instead, their money works for them and in the end, armed with their shares, they participate in profit and loss every year.
On the other hand, stocks are also called bonds and are issued by governments and companies to borrow money from the public. In most of them, the interest to be paid and when, is clearly stated in addition to when the full amount will be redeemed.
Stocks can be redeemable or convertible. Convertibles stocks are the ones that could be converted into shares representing part ownership when due for payment while redeemable ones of course, are to be repaid when due,
Shares can also be issued as preference and ordinary shares. Preference shares are issued, as the name suggests, to attract investors who want to share in the year's profit but do not want to bear the full risk of ownership. They are then given preference when dividend is to be paid but only to clearly stated percentage and ordinary shareholders are then free to partake of what remains.
In recent years, preference shares have not been that popular and in fact, given the guaranteed rates and repayment in bonds or stocks preference lose attraction even in troubled times.
THUS:
* Tomorrow, we will briefly go through why people invest in stocks and shares.
* Meanwhile, post any questions you want answered or issues you want treated in this series as part of your comments.
* Let us make it a date tomorrow, Wednesday, October 14, 2015.
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