The MO₦£¥ Pie
Darryl has scored a gig that will pay $2000. But there is a problem, Darryl cannot drive. He comes to you with an offer – “Drive me to this location for 10% of my profit”. You, as a good friend, accept the offer, you drive him and get paid $200. Darryl has offered you a partnership that pays 10% of his profit for your time.
Shares or equity securities work similarly. They are pieces of ownership interest in a company that pay dividends to shareholders. Darryl or the company is the issuer, you are the investor or shareholder, and the $200 is your income from dividends.
Darryl’s case is an example of how businesses sometimes need external resources to undertake specific projects. By exchanging a piece of the project’s expected profits for your cash or funds today, such projects become a reality.
Shares also offer extra income (separate from dividends) when its price increases. Yahoo! Finance reported Oracle’s shares at the end of April 7, 2020, was $50.31/share. Today August 18, 2020, the Oracle price/share is $55.18, If you had bought 100 Oracle shares in April, selling them today would earn you $487 (100*[$55.18 – $50.31]). This increase is known as a capital gain, if the price had dropped below $50.31 that’s a capital loss.
The common or the preferred? 🤔
Our friends at the WorldBank tell us the total value of equity securities traded for 2019 was US$ 60.359 trillion! That is a lot of money! Now the question is, how can you join the US$ 60.359 trillion club?
Generally, there are two types of shares available for investors; common or ordinary shares and preference shares.
In the blue corner, common shares represent an ownership interest in a company and allow you, the investor or shareholder, a claim on its profits, the opportunity to partake in corporate decision-making and a claim on the company’s net assets in the event the company ceases to exist.
In the red corner, preference shares are a form of equity in which fixed payments are made to preference shareholders, while not guaranteed, is nonetheless considered primarily an obligation the company must pay. These payments take preference over any payments made to common shareholders.
Before you pick a corner, here are some points to note. For the blue corner, you become a common or ordinary shareholder and fancy:
- The right to vote in company affairs
- Earnings from an increase in the market process of share dividends
- Higher risks
- Receive dividends after preference shareholders
Majority of the shares traded on NASDAQ, for example, are common shares. You can buy common shares of IBM, Apple, Facebook.
For the red corner, you become a preference shareholder and have:
- No voting power
- Fixed earnings
- A claim to company assets before ordinary shareholders
- A right to receive dividends before ordinary shareholders
Companies offering preferred shares include Bank of America, Georgia Power Company and MetLife.
Choices, Choices, Choices!
Over the long term, equities tend to outperform other investments but are more exposed to risk. Do you prefer more control or stability? Your risk appetite will determine whether you will be an ordinary shareholder or a preference shareholder. Join the trillion-dollar club.