If you encounter the word "INVESTING," what usually comes into your mind? For ordinary people, who do not have any interest in financial planning and wealth building, it is typically the image of stockbrokers in the Wallstreet calling and dealing from their analog phones. Do you think investing is just that easy? Stockbrokers are calling you with your bank details, and you are dealing with them for the stocks that you want to spend with your money. Is that what investing looks like to you?
I am sorry (probably not) to break this to you. Investing is a whole lot more different than what you think it is. Investing may seem so confusing to us, but we can learn and study what investing truly is.
Before we talk comprehensively about stocks investing, let us first talk about the true meaning of investing. Investing is defined as "to devote (one's time, effort, or energy) to a particular undertaking with the expectation of a worthwhile result," according to Merriam Webster dictionary. This definition is true when it comes to the general idea of investing. However, it may or may not be valid as far as financial investing is concerned.
Investing may be different for each person. It can indicate different meaning to different people. Some people invest in relationships. Their time, effort, and energy are devoted to their family, friends, and co-workers. Some people invest in their education. Their time, effort, and energy are dedicated to studying and learning what they want. Some people invest in their jobs. Their time, effort and energy are devoted to working and climbing up the corporate ladder. You get it. Investing can be different to different people.
However, investing financially can be different from its book definition. Financial investing is to devote your money to a particular instrument that should be with the management of risks and returns. Financial investing also has many subparts that could mean different from each other. You could invest from stocks, bonds, real estate, time deposits, VUL, and other types of investments that are in the financial market today.
For now, we would focus on stocks. What are stocks, and how can I invest in it?
Where It Begins
You may wonder where does a corporation get its capital. Corporations, in particular, have equity that is composed of the incorporator's share in capital, the stockholder's share in capital, and the retained earnings. These accounts are seen in the corporation's balance sheet.
Incorporator's need to have an initial investment to establish the corporation. The amount is dependent on what country that corporation will be created. That is the first capital that the corporation acquired to make the business run. Second, usually, when corporations need more funds to add to their operation, they will issue stocks privately or publicly. By privately, meaning, the corporation is issuing the shares to only a specific group of people because the corporation is not listed to the stock exchange, which is public.
Public issuance of stocks is the standard way to invest in the shares of a corporation that is listed on the Stock Exchange. If you are investing in stocks, you are buying a corporation's share of stock. To add more clarification, stocks and shares are used interchangeably in this field, but they are a little different from each other. "Stocks" is used as a generic term, whereas "shares" is explicitly used. If you say, "I am investing in stocks." It practically says that you have different shares from different companies. However, if you say, "I own shares." The usual follow-up question is, "In what company?"
A share represents the interest or right of a shareholder in a corporation. The four powers of a shareholder are:
1. To share in the earnings of a corporation
2. To vote in the election of directors and the determination of specific corporate policies
3. To subscribe for additional shares issues - That is the right of preemption or stock right
4. To share in net assets of the corporation upon liquidation
However, there are two kinds of shares. Common or Ordinary share and Preferred share.
Ordinary Share Capital
Usually, if there is only one class of share capital in the corporation, it necessarily is ordinary shares. It is called ordinary shares primarily because the ordinary shareholders have the same rights and privileges in the company.
Ordinary shares give the owner the right to vote, a share in the income, and in the event of liquidation, a share in all assets after prioritizing the creditors' and preference shareholders' claims.
Ordinary shareholders have no fixed or specific return on investment compared to the preferred share, which we will talk about later. The only financial rewards for this type of share is dependent on the operations of the entity and the performance of it in the stock market.
Also, ordinary shares can not be converted for preferred shares. In regards to the company's dividends, the company's board of directors will determine whether to pay out a dividend to ordinary shareholders or not. If a corporation doesn't give a dividend this year, the common stockholder will be the last in line when the company decides to pay in the coming years.
The right over a company's income and earnings is paramount during times of bankruptcy. However, in times of liquidation, ordinary shareholders are last in line for the company's assets. This means that when the company will liquidate its assets, it will pay first all creditors, bondholders, and preferred shareholders.
Preference Share Capital
Preference shares are called preference shares because of the favorable treatment to preference shareholders. One thing that differs preference shares from ordinary shares is that the preference shares have no voting rights. Preferred shares function similarly like bonds because it has a fixed and specified dividend yield, and is greatly affected by interest rate.
For example, a holder of $100 par value preference share with a 12% dividend yield is entitled to an annual dividend, if declared, of 12% of $100 or $12. Also, unpaid dividends from the past years are paid with priority once the company declares a dividend payout.
Also, as I said, preference shares have the priority in liquidation, meaning they are first to claim the assets of the corporation once the corporation is insolvent. Also, in contrast to ordinary shares, the portion of dividends for each preference shares is more than the ordinary shares, which in fact, many companies do not pay dividends to ordinary shares at all.
Unlike common shares, preference share could be callable, meaning the corporation can redeem the shares for a premium in the future. This feature makes preference share more attractive for people who want fixed dividend pay-outs and possible gain if the corporation redeemed their shares.
Now you may wonder what is the importance of knowing the classification of stocks. This knowledge is essential for you and for your decision making for stock-picking. You can use this knowledge to determine what is the best stock for you.
After that the basics of stocks are discussed, you can now read some comprehensive stock investing articles and books that could guide you in your stock investing journey.
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