One of the reasons we started Afrika Kesho was so that we could encourage people to invest their money, not just save. This so that everyone can benefit from compounding – that effect where your money babies make more money babies. However, before people can start investing, they must know what investing is, how they can do it, and what they’re investing in. Investing is when you buy assets so that they can make you money. Assets include things like shares in a company, properties that you rent out, government bonds or having your money earn interest in a money market or a savings account.
As an asset class, shares a diverse in the privileges they afford you. The differences are there because a company may want to give you different advantages depending on the type of shares you hold. Some types of shares are:
- Ordinary shares
- Non-voting ordinary shares
- Deferred ordinary shares
- Preference shares
- Redeemable shares
The differences in the types of shares lie in your entitlement to profit, your entitlement to the money you invested if the company is liquidated (the company is closed down, all its assets are sold and its liabilities are paid off), and your right to vote in the company. The types of shares that you decide to buy must be in line with your investment strategy, your risk tolerance and your financial goals.
Here is what each type of share entitles you to:
- Ordinary shares: these have no special rights or restrictions. If you have ordinary shares in a company then you are entitled to voting rights, but you would be the last one to be paid if the company was liquidated.
- Non-voting ordinary shares: these shares are exactly the same as ordinary shares, but without any voting rights. It could also happen that you have voting rights only under certain circumstances.
- Deferred ordinary shares: if you hold deferred ordinary shares, you will not receive a dividend until all other classes of shares have been paid a minimum dividend. In every aspect, they are like ordinary shares.
- Preference shares: holders of preference shares usually receive their dividends before holders of ordinary shares. They also receive a set amount of dividend, even if the company has an increase in profits. Preference shares have no voting rights. In the case of liquidation, preference shareholders get paid before ordinary shareholders.
- Redeemable shares: these shares can be bought back by the company in future. The date for the buying back of the shares can be fixed, or it can whenever the company decides to buy them back. Sometimes the shareholder has the option to sell the shares back to the company. Companies must have some non-redeemable shares at all times, because they are not allowed to have only redeemable shares.
This list of types of shares is not exhaustive. It’s a list of some of the most common types of shares, ordinary shares topping that list of course. It’s not unusual for companies to offer different types of shares so that there’s a variation in privileges amongst the shareholders. For example, a company can give its employees redeemable shares in that company so that if they can be bought back from employees who leave the company.
In case you didn’t know, you can only buy shares through a stockbroker. Click here to find out how to choose the perfect stockbroker for you.
Now that you know about more than just ordinary shares, be an extraordinary shareholder.
This article was written by Tumelo Koko.
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