RISK IS A four-letter word to be mindful of when trying to spend money wisely in purchasing stock in a company. With a better understanding of share capital, you will be in a position to assess some of the risks of share ownership.
When you buy shares in a company, the normal expectation is an attractive return on your investment over time.
As a shareholder in a private firm selling your shares, if there is a willing purchaser and no other impediments to the sale, then the corporate secretary of the company will assist with the share transfer. Transfer tax is also applicable to the sale.
Shares in a public company may be easier to sell since the public is your market, whereas those in a private company may take a little longer because of the smaller group of possible purchasers.
The sale price of the share usually reflects the financial performance of the company and the company’s prospects for the future. Yet, in a relatively small market like Barbados, where there are fewer persons interested in investing in shares, sometimes even when a company is performing well financially, there is little or no increase in the share price although the book value of the company has increased.
Owning shares in a company gives you certain rights. For example, you are entitled to adequate notice of and an invitation to the annual general meeting, to receive the report of the directors and of the auditors on the operations of the company for each financial year.
This is very important in providing the information to assess the company’s performance and the annual general meeting provides an occasion for shareholders to ask pertinent questions.
You are also entitled to your pro rata share of any dividend declared. You have a right to vote on any matter properly before a general meeting of shareholders.
Many first-time investors are impressed with the dividend received as some measure of their return on the funds invested. However, your investment grows also by the capital appreciation of the company. That is, the company may only be paying out part of the net earnings of each year. The additional retained earnings of the company also add to the book value of the company.
This value is usually reflected in an upward movement of the share price. It is therefore important to carefully review the profitability (or lack of profitability) of any company in which you have invested.
If the company has made a loss or is making consistent losses, unless the directors can reasonably defend future positive prospects for the company, it may be the time to sell those shares.
Yet a proper assessment of the financial performance of the company in the short term and of its prospects for the future takes special skills. For example, you need to consider the quality and impact of the executive management, the age and quality of the fixed and current assets, the level of current and long-term debt, and the sustainability and growth in the company’s main markets with regard to its future profitability prospects.
Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. Email LouiseFairsave @nationnews.com.
This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.
