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The capital market consists of many different financial institutions or intermediaries offering capital market instruments, each of which has different risk and return features. There are opportunities in ordinary shares, preference shares, fixed interest bearing securities, unit trusts, derivatives and property trusts. Investing your savings in the capital market via ordinary shares means buying shares with a limited liability. This means that you will have a limited liability as an investor, should the company be liquidated at any stage.

How ordinary shares work

Buying ordinary shares in a company allows you to invest in such a way that you will never lose more than 100 per cent of your investment in that particular company, should it ever go belly-up. If you invest in ordinary shares with a company, your name will appear in the company’s member register and you will receive share certificates accordingly.

Ordinary share certificates are proof of your investment. What this implies is that you have put your money at the disposal of the company for an unlimited period of time. Essentially, you are a supplier of capital and you carry a certain financial risk. You can’t withdraw your money from the company but since they are transferable, you can trade your shares. These may sell for more or less than what you originally paid.

Dividends

As an ordinary shareholder in a company, you may receive dividends. These dividends are not guaranteed though as the company must first settle its fixed interest obligations and pay out dividends to preference shareholders. A company may also decide to hold dividends in order to finance projects.

Depending on your objectives, you could choose between receiving income (dividends) or capital growth (dividends are reinvested).

The risks

Although you have voting rights as a shareholder, there is no guarantee that you will receive dividends. The company you invest in is not obligated to pay you the money it has borrowed from you as it legally obligated to pay interest and preference dividends first, should it make a profit. Should a company be liquidated, ordinary shareholders are the last to be paid out, if at all.

Tags: Finances, investing