Fixed income investment supplements our primary income. It also assists you when you retire. There are different types of shares that are offered by companies and before you invest on them, you should know their benefits and rights.
Have you ever wondered about fixed income investment? There are many types of securities that are offered by various companies to the public for subscription. But today,
let’s talk about shares.
Benefits Derived from Shares
1. They act as one way of saving your money for future requirements.
2. They act as security for securing loans from financial institutions.
3. They are high liquid assets thus they can be bought and sold at profits.
So what is a share? It is a unit of ownership in a company. When you buy shares, you own part of the company’s capital which is its live hood. To be a smart investor, your investment purpose should be coupled with safety. You have to buy the right type of shares from the right company. Why do this? Well… it’s because you want to ensure:
(1) Frequent and justified dividends.
(2) To ensure that you invest in a company that is productive with good management.
(3) To protect your interest.
Generally, Shares are classified into Two Broad Types
1. Preference
These are the ones that carry privilege rights with regard to payment of dividends and return of capital compared to other types of shares. The categories of this type of shares are:
A. Cumulative Preference Shares
Under this, the amount of unpaid dividends is carried forward as arrears. The dividends are paid in the following year before any dividend is paid to equity shares.
B. Non-Cumulative Preference Shares
In case the company does not make any profits to be declared as dividends, then this category of shares are not paid any arrears of unpaid dividends in subsequent years (no accumulation of dividend.)
C. Participating Preference Shares
They are paid fixed rate of dividend. They also receive surplus of the net profits after all other payments have been made.
D. Non Participating Preference Shares
They only receive a fixed rate of dividend without any payments of surplus in the net profits.
E. Redeemable Preference Shares
In accordance with their terms of issue, they can be redeemed at the discretion of the company.
F. Irredeemable Preference Shares
They cannot be redeemed at all during the life time of the company.
G. Convertible Preference Shares
They can be changed to equity shares within a fixed period of time if there is such option in the company.
H. Non Convertible Preference Shares
They cannot be changed to equity type of shares.
2. Equity Shares (Ordinary Shares)
Equity shares make investors to be the real owners of the company. They are referred as real ownership of the company because they carry voting rights. Investors are able to control the affairs of the company once they own them. They do not have preferential rights in regard to annual payments of dividends or the return of capital in the course of winding up of the company.
They have high risks in that if the company does not receive profits, they will not also receive any dividends. Due to their high investment risks, they are rewarded high dividends in boom periods. They are also entitled to company’s assets in the events of its winding up.
