A share, or equity, is a portion of a company’s capital. By acquiring a share, the shareholder (investor) becomes an owner of a portion of a company’s capital. It grants the shareholder the right to receive dividends and the right to vote. 

A dividend is a share of profit distributed to shareholders. It varies according to the company’s revenues․

The right to vote allows an investor to participate in the company’s key decisions. The more shares the investor holds, the greater the impact of their voting rights on the company’s decisions.  

What Are the Characteristics of Shares? 

Shares are characterized by: 

• Potentially high returns and high risk 
• A long-term investment horizon 

Shares can offer potentially higher returns than other asset classes in exchange for potentially higher risk. Thus, they are especially recommended for investors with a limited risk aversion and want a high potential return. 

Like bonds, shares provide income to shareholders in the following forms: 

1. Increased value

The price of a share changes over time and is recalculated continuously. Its price* is determined based on the difference between the price at which the share can be sold on the market and its purchase price, as well as according to the company’s revenues and its financial ratios relative to other companies in the same sector. 

If a company reports strong financial results, investors will want to buy its shares. The increase in demand leads to a rise in the share price on the stock exchange. In addition to financial indicators, other factors also affect the price, including general market sentiment, economic conditions, and even news or speculations.

*More on the stock price in the next issue

2. Potential Income 

This income is earned while owning a share is called “dividends”. Dividends are usually paid quarterly, the amount of which is determined by the board of directors based on the company’s revenue. There are companies that do not pay dividends and instead reinvest them in the company.

Types of Shares 

Shares have main two types: 

• Common Shares 

Common shares grant their owners all typical shareholder rights, including decision-making participation, receiving dividends, and other rights. 

• Preferred Shares 

Preferred shares do not grant voting rights at shareholder meetings, meaning the shareholder cannot participate in the company’s governance decisions. At the same time, the owner of a preferred share has greater rights to assets and profits than in the case of the acquisition of common shares. For example, owners of preferred shares receive dividends before common shareholders and have priority in the event of bankruptcy or liquidation.

Shares are also distinguished by their circulation on stock exchanges.

• Listed Shares 

Each listed company has a defined number of shares that are traded — bought and sold — on the stock exchange. The share price is recalculated constantly during trading hours and changes according to supply and demand. 

• Private Equity 

Private equity is an investment in companies that are not traded on a stock exchange and buying and selling occurs “over the counter” through the company, making it harder to acquire them. Here, higher returns are expected from investments than from transactions on stock exchanges. This makes hard to determine the price due to the lack of rating and regular trading. To value these shares, a specialist is often requested to examine and compare the company’s financial statements to those of similar companies.