Understanding Stock Investments: A Crucial Step Before Diving In
Equip yourself with a comprehensive understanding of what stocks represent and how they function prior to embarking on your investment journey.
Key Insights:
- As a shareholder, your earnings can either come from dividends or from the sale of your stocks when their market price increases.
- A company’s stock price is subject to market volatility and could be negatively impacted if the company faces severe financial strain.
Stocks Simplified: When a company decides to sell its stocks to investors, it’s a way of raising necessary funds. These funds can be utilized to expand its operations, acquire new assets, or ensure financial stability.
How It Unfolds: Once you purchase a company’s stocks, you officially become a shareholder.
Returns for Shareholders: Dividends and Capital Appreciation: As a shareholder, your returns can come from dividends or from selling your stocks at a higher price than what you originally paid. However, not all companies have the profits to distribute dividends, or they might prefer to reinvest profits back into their operations.
The value of a listed company’s stocks can fluctuate due to:
- Broader economic and market trends
- Specific circumstances within an industry or a particular company (e.g., growth potential, future earnings, etc.) It’s important to note that stocks may not all respond identically to the same economic, market, or business circumstances.
Types of Stocks: Stocks are generally classified into two categories: common (or ordinary) shares and preferred shares. In this guide, the term “stocks” mainly refers to common shares.
Your Privileges as a Shareholder: As an ordinary shareholder, you are entitled to attend and cast votes at general meetings. If the company in which you’ve invested goes into liquidation, you have the right to any remaining assets after all outstanding liabilities have been settled.
You May Be Interested
Fundsmith Fund: The Equity Fund with 15-21% Returns (Updated July 2023)
What Could Be Your Maximum Loss?
Other than shifts driven by the market, a company’s stock price can also plummet if the company’s performance dips or it encounters serious financial setbacks. In such a scenario, shareholders bear more risk than bondholders and other creditors. Should the company go under, shareholders stand last in line to claim any remaining assets after all the creditors have been compensated. In a worst-case scenario, a shareholder could potentially lose their entire investment in the company.
Potential for Trading Pauses or Suspensions
Publicly listed companies may ask for a trading halt or suspension in order to share significant information with investors. The Singapore Exchange (SGX) can also opt to suspend the trading of a company’s stocks under certain circumstances. During such a trading halt or suspension, transactions involving the company’s stocks will be impossible on the stock exchange.
Paying Attention to Rights Issues and Other Corporate Activities
Companies may undertake various corporate activities such as issuing bonus shares, rights issues, or share buybacks. As a shareholder, it’s essential for you to understand how these activities might impact you.
Any proposed corporate action will be announced by the company listed on the SGX. Depending on the type of action (for instance, a rights issue or a significant acquisition), the company will also share a circular with shareholders detailing the proposed action. Such announcements and circulars can be accessed on the SGX’s website.
If a proposed action requires shareholder approval, you may be called upon to attend a general meeting and vote (or assign a proxy to vote) on the proposed resolutions. Make sure to thoroughly review and understand any documents the company provides before you attend these meetings to cast your vote, or before assigning your proxy.
Related:
Best Investment- Linked Policy Detailed In-Depth Comparison Singapore 2023
Implications of Rights Issues for You
During a rights issue, the company extends an offer to current shareholders to buy additional shares, typically below the current trading price, within a defined timeframe. The quantity of new shares shareholders can buy aligns proportionately with their existing shareholdings.
|
Advantages |
Disadvantages |
|
Shareholders can purchase shares at a reduced price. |
Your existing holdings could be diluted if you decide against investing more money into the company. |
| Post the rights issue exercise, the company’s earnings per share (EPS) will decrease due to the increased number of shares. |
The opportunity to buy more shares in a company you already own might seem attractive. However, before making a decision, ensure you comprehend the company’s spending plans for the raised funds and assess the implications for its future prospects.
Engaging at General Meetings
As an ordinary shareholder, you’re entitled to attend general meetings and vote on significant matters, such as large-scale acquisitions or disposals, and the election of directors. These meetings offer a platform to interact with the company’s board or senior management and voice your opinions on company-related issues. If you can’t attend a general meeting, you have the option to vote by proxy, with instructions provided by the company.
Familiar Terms
If you’re venturing into share investments, there are a few terms you might come across frequently:
An Initial Public Offering (IPO) is typically made by companies aiming to list on the SGX. You can subscribe to an IPO via internet banking, bank ATMs, or physical subscription forms. The company is required to prepare a prospectus, which must be registered by MAS, related to this offering.
Different shares can be classified as blue chips, growth stocks, cyclical stocks, and so on, based on their individual characteristics. Blue chips refer to large, reliable companies with robust track records. Meanwhile, some shares may display growth or cyclical traits. This classification is guided by market conventions and can evolve over time.
Market Capitalization
Market capitalization refers to the total market value of a company’s shares. Depending on their market capitalization, shares may be labeled as small caps, mid-caps, or large caps. The definitions of these classifications depend on the specific market of interest. Shares with smaller market capitalizations might belong to newer, lesser-researched companies.
Related:
Investing in shares might not be suitable for everyone. Prior to investing, ensure that you:
• Have a clear understanding of the factors and scenarios that can impact share prices.
• Comprehend the risks associated with shares.
• Are aiming for potentially higher returns but are prepared to face the risks, which include the possibility of losing a significant portion, or even all, of your investment.
• Are capable of building a sufficiently diverse portfolio of assets (avoiding over-concentration in a few types of shares or asset classes).
• Are ready to have your money invested for longer periods (a longer investment horizon is usually preferred to withstand short-term price fluctuations and aim for potentially longer-term gains).
• Have the necessary time and resources to keep track of the markets, corporate performance, and respond to corporate actions like rights issues.
Investing in stocks is a journey filled with opportunities, risks, and responsibilities. From understanding the different types of stocks and potential returns to acknowledging the inherent risks and staying abreast of corporate activities, the world of share investment requires careful consideration and ongoing engagement. Whether you’re a seasoned investor or just starting, having a tailored investment strategy is key.
