The risks of share ownership
WITH A BETTER understanding of share capital, you will be in a position to assess some of the risks of share ownership.
When you buy shares in a company, the normal expectation is an attractive return on your investment over time.
As a shareholder in a private firm selling your shares, if there is a willing purchaser and no other impediments to the sale, then the corporate secretary of the company will assist with the share transfer. Transfer tax is also applicable to the sale.
Shares in a public company may be easier to sell since the public is your market, whereas shares in a private company may take a little longer because of the smaller group of possible purchasers.
In addition, establishing a sale price for the shares in a public company will be what the market will pay. On the other hand, sale of shares in a private company will be sold in a limited, imperfect market.
The sale price of the share usually reflects the financial performance of the company and the company’s prospects for the future.
Yet, in a relatively small market like Barbados, where there are few people interested in investing in shares, sometimes even when a company is performing well financially, there is little or no increase in the share price, although the book value of the company has increased.
Owning shares in a company gives you certain rights. For example, you are entitled to adequate notice of, and an invitation to, the annual general meeting, and to receive the report of the directors and of the auditors on the operations of the company for each financial year. This is very important in providing the information to assess the company’s performance and provides an occasion to ask pertinent questions.
You are also entitled to your pro rata share of any dividend declared. You have a right to vote on any matter properly before any general meeting of shareholders. Many first-time investors are impressed with the dividend received as some measure of their return on the funds invested.
However, your investment grows also by the capital appreciation of the company. That is, the company may only be paying out part of the net earnings of each year. The additional retained earnings of the company also add to the book value of the company.
This value is usually reflected in an upward move of the share price. It is therefore important to carefully review the profitability (or lack of profitability) of any company in which you have invested.
If the company has made a loss or is making consistent losses, unless the directors can reasonably defend future positive prospects for the company, it may be the time to sell those shares.
Yet a proper assessment of the financial performance of the company in the short term and of its prospects for the future takes special skills.
For example, you need to consider the impact of the executive management, the age and quality of the assets, and the sustainability or growth in the company’s main markets with regards to its future profitability prospects.
Such an assessment helps to protect your investment as to which stock to invest in and when best to sell certain stock.
Assessment of the business performance must also involve a review of the cash flows of the company in which you invested. You may be surprised to know that a company could go broke while making a profit.
• Louise Fairsave is a personal financial management advisor, providing practical adviceon money and estate matters. Her advice is generalin nature; readers should seek advice about their specific circumstances.