We understand in detail what shares are, what rights they give and how their owners get profit.
What is a stock (share)?
A share is a security issued by a joint stock company, in other words, an issuing company. All investors who bought shares became co-owners of the company. The share just confirms that its owner has a stake in the company, even if it is very small.
What do the shares give to the owner?
You've probably heard the expression "controlling stake" - usually in the movies, the villain insidiously takes over the company, taking 50% and one more share. Although this villain is not one hundred percent owner, he still gains control over the company, because he owns most of it.
But even if you bought not a controlling stake, but only a tiny piece of the company, you become a shareholder and also receive rights, the main of which are:
Why is the right to vote important? Because all the most important decisions are made by the general meeting of shareholders. Including decisions on liquidation and reorganization of the company. It is the meeting that decides how best to dispose of the profit at the end of the year: to direct all the money for business development or part of it - for the payment of dividends.
What are the types of stock?
Shares of companies are common and preferred. The differences are related to two main rights - to vote and receive dividends.
Sometimes there are special types of preferred shares:
All shares can be ranked according to the order of the dividend payment. If the shareholders' meeting decides to pay dividends, the owners of preferred non-voting shares receive them first. They have a fixed dividend - a specific amount or percentage of their par value. Holders of preferred non-voting shares participate in voting only in those cases when there is a question about liquidation of a joint-stock company.
The second in line for dividend payments are the owners of standard preferred shares. The amount of dividends on these shares can be equal to a specific amount or a percentage of the face value of a share. But most often it is defined as a percentage of the company's net profit for the year, divided by the number of preferred shares. The procedure for calculating a dividend is usually spelled out in the charter. The owners of such shares cannot vote if dividends are paid. But if dividends were not accrued, then at the next meeting they receive the right to vote on all issues.
One joint stock company may have several types of preferred shares, including shares with special rights. The company's charter must clearly state the order in which dividends are paid to their owners. Therefore, before purchasing preferred shares, carefully study the charter of the joint stock company.
Payment of dividends to holders of ordinary shares is made only after the company has fully fulfilled its obligations to all preferred shareholders.
What do stocks look like?
Strictly speaking, no way. Due to cinematic and literary stereotypes, the very word “action” is usually associated with a beautiful stamped letterhead. But today, shares are not luxurious pieces of paper, they are not printed at all, they, in official language, are uncertificated, that is, they exist only in electronic form.
Securities are kept by special organizations - depositories and registrars. But before you work with them, make sure that they have a license from the Bank.
How are securities recorded?
Why buy stocks?
You can buy a block of shares to participate in the management of the company. But most often they are bought to generate income.
What taxes do shareholders pay?
If you received income (due to dividends or due to the difference in price when selling shares), then you will have to pay tax.
You always need to pay personal income tax on dividends.
Income from the sale of shares is tax exempt under three conditions:
Where can you buy shares?
There are two ways - on-exchange or off-exchange. Trading on the stock exchange is more transparent - quotes (prices) of shares and other securities can be easily tracked. When you buy or sell shares directly off the exchange, there is a risk that prices will be overpriced or underpriced compared to market prices.
In addition, the exchange carefully evaluates the issuing companies. You are unlikely to find stocks of obvious scammers there. As a result of the check, the rest of the securities are assigned an important attribute - the listing level.
Today there are three of them. The first level (or the first quotation list) - the most liquid shares of the most reliable companies on the market.
To get into the second quotation list, the requirements are no longer so high. But all companies whose shares claim to be included in the first or second list must regularly report to the exchange on the results of their activities, as well as publish reports and all important information about themselves on the Internet.
The third level is the non-quotation part of the list with the lowest requirements. If you are going to buy securities of a third-level company or a company that is not even listed (list of securities) on the exchange, you will have to evaluate its reliability yourself. And this is not easy even for an experienced investor.
Information about issuers and their securities can be viewed, for example, on the website of the Stock Exchange or the Stock Exchange.
What risks can you face when buying stocks?
Investing is always a risk. And it is proportional to the likely return on a security: the more you can earn, the more you risk. There are three main risks that investors face.
Finally, we summarize the recommendations for novice investors.
What is a stock (share)?
A share is a security issued by a joint stock company, in other words, an issuing company. All investors who bought shares became co-owners of the company. The share just confirms that its owner has a stake in the company, even if it is very small.
What do the shares give to the owner?
You've probably heard the expression "controlling stake" - usually in the movies, the villain insidiously takes over the company, taking 50% and one more share. Although this villain is not one hundred percent owner, he still gains control over the company, because he owns most of it.
But even if you bought not a controlling stake, but only a tiny piece of the company, you become a shareholder and also receive rights, the main of which are:
- the right to vote at a meeting of shareholders and thus participate in the management of the company (if the share is voting);
- the right to receive dividends - a part of the company's profits (if they are paid);
- the right to receive part of the company's property in the event of its liquidation.
Why is the right to vote important? Because all the most important decisions are made by the general meeting of shareholders. Including decisions on liquidation and reorganization of the company. It is the meeting that decides how best to dispose of the profit at the end of the year: to direct all the money for business development or part of it - for the payment of dividends.
What are the types of stock?
Shares of companies are common and preferred. The differences are related to two main rights - to vote and receive dividends.
- Ordinary. The most common type of stock. They always give the right to vote at shareholders' meetings, but do not guarantee dividends.
- Privileged. Have a predetermined dividend amount - for example, a percentage of the company's profits. Their owners can vote only if they have not received dividends for the last year.
Sometimes there are special types of preferred shares:
- Privileged non-voting. Have a fixed dividend and the right to receive payments first, but are not allowed to vote.
- Privileged with special rights. The conditions for the payment of dividends and the possibility of voting are prescribed in the company's charter. For example, the owners of such shares may be able to vote, receive priority in the payment of dividends and the right to be the first to buy new issues of shares. Any other rights that the company wants to grant to their owners may be spelled out in the charter.
All shares can be ranked according to the order of the dividend payment. If the shareholders' meeting decides to pay dividends, the owners of preferred non-voting shares receive them first. They have a fixed dividend - a specific amount or percentage of their par value. Holders of preferred non-voting shares participate in voting only in those cases when there is a question about liquidation of a joint-stock company.
The second in line for dividend payments are the owners of standard preferred shares. The amount of dividends on these shares can be equal to a specific amount or a percentage of the face value of a share. But most often it is defined as a percentage of the company's net profit for the year, divided by the number of preferred shares. The procedure for calculating a dividend is usually spelled out in the charter. The owners of such shares cannot vote if dividends are paid. But if dividends were not accrued, then at the next meeting they receive the right to vote on all issues.
One joint stock company may have several types of preferred shares, including shares with special rights. The company's charter must clearly state the order in which dividends are paid to their owners. Therefore, before purchasing preferred shares, carefully study the charter of the joint stock company.
Payment of dividends to holders of ordinary shares is made only after the company has fully fulfilled its obligations to all preferred shareholders.
What do stocks look like?
Strictly speaking, no way. Due to cinematic and literary stereotypes, the very word “action” is usually associated with a beautiful stamped letterhead. But today, shares are not luxurious pieces of paper, they are not printed at all, they, in official language, are uncertificated, that is, they exist only in electronic form.
Securities are kept by special organizations - depositories and registrars. But before you work with them, make sure that they have a license from the Bank.
How are securities recorded?
- If your securities are accounted for by the depositary, then the ownership of them is confirmed by a statement of the depo account. This is your personal account, where it is indicated what securities you own.
- If the registrar keeps records, then in order to confirm the ownership, you need to request a personal account statement from the registrar. This statement shows how many shares you have in a particular company.
Why buy stocks?
You can buy a block of shares to participate in the management of the company. But most often they are bought to generate income.
- Through dividends. If at the end of the year the company made a profit and the general meeting decided to distribute it among the shareholders, then you will receive dividends on each of your shares.
But there is no guarantee that you will receive money. If the company worked negatively or the meeting decided not to distribute profits to shareholders, you will not receive dividends. This is a risk that always accompanies an investment. - Due to the growth in the value of the shares. You buy a stock and expect its price to rise in the future. When you sell them, you will receive income - the difference between the price you bought the stock for and the price you sold it for. Do not forget that you still have to pay for the services of the custodian or registrar, the broker's commission and the sales tax. Moreover, you may not only not receive income, but, on the contrary, even lose money. For example, if the stock gets cheaper. As you know, there are no guarantees on the securities market and there cannot be, but there is always a risk.
What taxes do shareholders pay?
If you received income (due to dividends or due to the difference in price when selling shares), then you will have to pay tax.
You always need to pay personal income tax on dividends.
Income from the sale of shares is tax exempt under three conditions:
- You bought shares on the exchange after January 1, 2014,
- kept them for at least three years
- and earned from a difference in price of less than 3 million per year.
Where can you buy shares?
There are two ways - on-exchange or off-exchange. Trading on the stock exchange is more transparent - quotes (prices) of shares and other securities can be easily tracked. When you buy or sell shares directly off the exchange, there is a risk that prices will be overpriced or underpriced compared to market prices.
In addition, the exchange carefully evaluates the issuing companies. You are unlikely to find stocks of obvious scammers there. As a result of the check, the rest of the securities are assigned an important attribute - the listing level.
Today there are three of them. The first level (or the first quotation list) - the most liquid shares of the most reliable companies on the market.
To get into the second quotation list, the requirements are no longer so high. But all companies whose shares claim to be included in the first or second list must regularly report to the exchange on the results of their activities, as well as publish reports and all important information about themselves on the Internet.
The third level is the non-quotation part of the list with the lowest requirements. If you are going to buy securities of a third-level company or a company that is not even listed (list of securities) on the exchange, you will have to evaluate its reliability yourself. And this is not easy even for an experienced investor.
Information about issuers and their securities can be viewed, for example, on the website of the Stock Exchange or the Stock Exchange.
What risks can you face when buying stocks?
Investing is always a risk. And it is proportional to the likely return on a security: the more you can earn, the more you risk. There are three main risks that investors face.
- Market risk means that securities can rise or fall in price. It is determined only by the market law of supply and demand. For example, if a company discovers a new oil, gas, gold, or palladium field, its stock is likely to jump. And if, say, a license was suspended for a financial company, its securities would plummet.
- Liquidity risk means that the securities that you purchase may be difficult to sell later. Either no one wants to buy them at all, or they agree, but only with a large discount - at a greatly reduced price. That is, "blue chips" - the securities of the largest and most reliable companies - you can, if you wish, sell in a matter of minutes. And for the shares of the unknown "Pupkin and Co" it is unlikely that there will be a queue of those who wish.
- Credit risk is the risk that the issuing company will go bankrupt. Then your securities will depreciate dramatically. But you will be able to count on your share of the company's assets at the end of the bankruptcy procedure.
Finally, we summarize the recommendations for novice investors.
- Do not invest your last money in the securities market. First, prepare yourself a reliable rear: deposit 3 to 6 of your monthly income in a safe bank.
- Remember the direct relationship between risk and return. If some stocks rise sharply in price (or it seems to you that they should take off), this means that they may fall just as sharply (or simply not rise).
- Don't put all your eggs in one basket. If you decide to invest in stocks, choose several companies, preferably from different industries.
- Keep your finger on the pulse of events. If you become a co-owner of a company, keep track of what is happening with it and with the price of its securities.
- If you find it too difficult or troublesome to monitor the situation in the stock market on your own, you can use other options. For example, conclude an agreement with a trustee or buy a share of a mutual fund that invests in securities.
