When a person with a sufficient amount of personal capital decides to become a private investor and gain access to trading on the stock market, he turns to a broker.
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The broker, noticing that the client who contacted him has little knowledge in the field of stock trading, will definitely offer to attend training courses. But it very often happens that attending courses costs a lot of money, and a novice private investor may simply not have enough free time to attend them, since a novice investor, as a rule, has a main type of employment and it is not advisable to leave it for new endeavors.
Ordinary and preferred shares
In general, the concept of a share hides a type of security, which is strict evidence that the investor has attracted his own funds into the capital of the joint-stock company and has the right to receive dividend profits.
Upon further study of shares, the question immediately arises of how preferred shares differ from ordinary shares.
An ordinary share is a security that gives its holder the right to receive dividend profit, assigns him the right to receive part of the property of the joint-stock company in the event of its liquidation, and also allows him to take part in shareholder meetings and vote for the adoption (rejection) of decisions within the joint-stock company.
In turn, a preferred share is a share with a solid fixed income, which gives the holder special rights, but at the same time imposes certain restrictions on him.
The main differences between preferred shares and ordinary shares
The main difference between preferred shares and ordinary shares is the process of making a profit.
Ordinary shares provide income from profits and how much will be allocated for dividends is decided by the board of directors.
Preferred shares provide income in any case and regardless of the profitability of the joint-stock company. The only exception is if the company is operating at a loss.
Also, holders of preferred shares cannot vote during a meeting of shareholders on pressing decisions. An exception occurs if the company is operating in the red. But here everything depends on the company’s charter.
In other words, learning for yourself what the difference is between preferred and ordinary shares, it will be enough to understand that the dividend yield on preferred securities does not depend on the current profit of the joint-stock company, but most often such a share deprives the holder of the right to vote at shareholder meetings.
When considering the question of how the value of a preferred share is determined, it is necessary to understand that there are two classical methods for estimating its value:
- The market value of ordinary shares multiplied by a certain coefficient;
- Implies the same valuation principle, but subtracts a certain cost discount.
What other types of shares are there?
In addition to the division into ordinary and preferred, all currently existing types of shares can be classified according to the following main characteristics:
By affiliation with the official exchange market:
- Exchange - shares quoted on official exchange platforms;
- OTC - shares traded on the over-the-counter securities market.
By media type:
- Documentary - issued on paper; nowadays this is a relative rarity, but previously absolutely all shares were issued in documentary form and all transactions for their purchase and sale were accompanied by the actual transfer of a pile of papers;
- Uncertificated - shares of this type are simple entries in securities accounts. Currently, all these records are stored on electronic media in depository databases.
According to the subject of the rights certified by them:
- Named . Shares of this type can only belong to a specific person, clearly identified by an inscription on its letterhead and recorded in the register of shareholders. Such shares can be sold (transferred or donated) only on the basis of a specific document (for example, a purchase and sale agreement or a gift agreement) or by means of an endorsement on the share itself (if it is issued in documentary form). All new owners of such shares are invariably shown in the company's shareholder register;
- To bearer . Such shares do not require mandatory documentary confirmation of the fact of their transfer to another person, the names of their owners are not recorded in the register of shareholders, and they give an unconditional right to a share in the company’s property and to a part of its profits to any person who presents them. Usually issued in the form of a certificate, that is, they have a documentary form.
According to the degree of reliability of the issuer:
- Blue chips or first-tier shares are the most reliable securities. Their issuers are the largest and well-established companies in the country. Such shares, as a rule, have a stable price and buying them in the hope of making money on its increase usually does not make sense. After all, these giants have nowhere else to grow. It makes sense to take such shares as part of strategies for earning money on dividends;
- Second-tier shares are securities of lesser-known and less successful companies that are not particularly reliable. Buying such shares can bring good profits in the form of an increase in their market value. But here you need to clearly understand all possible risks and approach the analysis of the issuing company very carefully;
- Third-tier stocks are the riskiest, but also the most potentially profitable of all of the above. These include papers issued by little-known small enterprises and various kinds of startups. It's more of a venture capital investment. Such shares can skyrocket in price, or they can (more likely) simply depreciate along with the bankruptcy of the company that issued them. Once upon a time, the third echelon included securities of such now world-famous companies as Google, Apple, Facebook and many others. And those who managed to recognize future giants in them in time, and invested a small amount of investment in them, have become billionaires today.
By stage of release into circulation
- Posted . These are those company shares that have already been issued and are in the hands of specific shareholders. They constitute the current market capitalization of the company (its size is equal to the total value of outstanding shares);
- Announced . These are those shares that have not yet been issued, but may be issued, for example, in order to obtain additional funds for the development of the company. Since their issue may lead to “dilution” of the company’s already issued shares (to a decrease in their market value and the rights that they give to their owners), its authorization requires the consent of the general meeting of shareholders of the company.
Finally, we can also distinguish such types as:
- Growth stocks are undervalued securities with a high potential for growth in market value. Dividends may not be paid on them, since all profits are completely directed to the further development of the company. These mainly include securities from the second and third echelons;
- Speculative stocks can be called an aggressive subtype of growth stocks. They are issued by very young companies, and therefore there is a high probability of both complete depreciation as a result of the bankruptcy of the issuer, and a huge increase in value (if the company is able to occupy its niche);
- Income shares are securities with stable and high dividends. They are usually issued by relatively young companies that actively attract investors in the form of new shareholders;
- Cyclical stocks - change in price depending on the current macroeconomic situation. They grow with the growth of the economy and decrease in times of crisis. These include most securities presented on the stock market;
- Defensive shares . They are called so because, due to their stable value, which is little dependent on the situation in the economy, they are included in investor portfolios as protective assets. These include papers from food, pharmaceutical, etc. manufacturers;
- Foreign shares are securities issued by foreign issuers.
Placed and announced shares
With further study of shares and their classification, another important classification comes up: placed and announced shares, the difference between which must be understood.
Placed shares are those securities that were issued by the joint-stock company and purchased by shareholders. In other words, they represent those shares, the value of which determines the current authorized capital of the joint-stock company.
Authorized shares are those shares that a JSC can place as an addition to existing issued shares in order to increase the authorized capital. Decisions on the issue of authorized shares are made only at shareholder meetings.
According to the ability to move freely
Shares of public joint stock companies (PJSC)
— may be distributed through open subscription. The number of shareholders in a PJSC is not limited.
Shares of non-public joint-stock companies (JSC)
- can only be distributed among its founders or a certain circle of people. A joint-stock company does not have the right to conduct an open subscription for issued shares, and shareholders have a pre-emptive right to purchase shares sold by other shareholders.
Owners of JSC shares, when selling them, must notify both the company and other shareholders in writing about the price and terms of sale.
The number of shareholders in a joint-stock company should not exceed fifty people.
From September 1, 2014, open joint-stock companies (OJSC) began to be called public joint-stock companies (PJSC), and closed joint-stock companies (CJSC) - non-public joint-stock companies (JSC).
Treasury and quasi-treasury shares
A deeper study of the securities market requires studying the difference between treasury and quasi-treasury shares. Treasury shares are shares that were previously issued shares and were held by shareholders, but were then repurchased by the joint stock company itself. Treasury shares do not participate in voting and do not provide the right to receive dividends.
Quasi-treasury shares are those treasury shares that the joint-stock company transfers to the balance sheet of a subsidiary. Quasi-treasury shares held in a subsidiary give the parent company control through voting rights.
Ordinary
Ordinary (ordinary) shares provide the owner with property rights and voting rights in the management of the company. Voting takes place at the general meeting of shareholders, where key decisions are made. Owners of small packages (minority shareholders) have the right:
- Attend and vote at the general meeting of shareholders.
- Elect the Board of Directors of the company.
- Receive dividends.
- Require any financial and business information, unless it contains state secrets.
- Make inquiries to company management.
- Conclude transactions for the purchase and sale of the owned share.
Types of shares
If a person owns a large block of common shares or even has a controlling stake in a PJSC, then the rights are much broader:
- Influence on the strategic and tactical development of the enterprise.
- A significant voice in determining dividends for the current period.
- Representation on the Board of Directors by one or more persons.
- Request for any financial, economic, operational, technological, production documents.
- Blocking some strategic issues of the company with a sufficient number of votes (usually 25% + 1 vote).
- Representation on the Audit Commission.
- Impact on the size of dividend payments.
- Make a decision on bankruptcy or liquidation of the enterprise.
Rights depend on the shareholding. Thus, in PJSC Gazprom, the owner of a 2% stake has the right to represent his person on the Board of Directors. The owners of the controlling stake are actually the managers of the enterprise; the owners of the blocking stake can prohibit certain initiatives of the company, for example, the alienation of property
Check out the terms and conditions of these brokers:
All shares in Russia, according to the law “On the Securities Market,” are uncertificated and registered. Ownership rights to these securities are recorded in special accounts of professional participants in the securities market - registrars, depositories, brokers.
Expert opinion
Dmitry Dunyashev
Blogger, private investor, project manager real-investment.net
The highest level of security of information about ownership of the asset is guaranteed. You can lose a paper security, but never electronic bills.
Cumulative shares
A special case of dividend payments are cumulative shares - these are the same ordinary shares that, in certain cases, pay dividend yield to the holder of ordinary shares. Most often, cumulative shares are used by a joint stock company during periods of serious financial difficulties.
Cumulative preference shares are those shares that provide a guaranteed right to receive dividends, even if none have been paid in the current period. In other words, the joint-stock company undertakes that if the holder of cumulative preferred shares has not received dividends in the current year due to the financial problems of the joint-stock company, then this dividend profit will be compensated to the holder in subsequent years.
Types of securities
Shares are divided into ordinary (ordinary) and preferred
– this division is due to the fact that the cost and procedure for paying dividends for different types of assets differ. In the first case, as we said above, money is paid when the company shows good results for the year, and it has free funds left after fulfilling its obligations to the owners of preferred assets.
Ordinary assets do not give the right to vote at a meeting of shareholders on current issues. They vote only in cases where the participation of each security holder is required. Such issues include, for example, the liquidation of a company. In other cases, the owner of the assets has the right to attend the annual General Meeting of Shareholders, but cannot influence its decisions. It is also allowed to get acquainted with documents that reflect the results of the company’s activities.
Owners of common shares take on the maximum risk, and this is their main difference from preferred securities. Holders of ordinary assets, as it were, provide an indefinite loan for the development of the company, while their potential revenue depends entirely on its activities, and therefore on the decisions of the management and board of directors of the company. If the company is doing well, dividends are paid and the value of the securities increases. Therefore, the investor is in the black in any case - even if interest in the asset has disappeared, it can be sold on the stock exchange for a profit. But if the financial situation is not so rosy, the holder of ordinary securities finds himself at risk - their price on the market decreases, dividends are not paid and the investor goes into the red.
Information
There are registered ordinary shares - the name of the holder is indicated on these securities. They do not provide additional rights, and are traded on the market in the same way as regular ones. The only difference is that when an asset is transferred, the specified name of the owner changes and the security must be re-registered in the JSC register.
But everything is not so sad. Ordinary shares are voting
– these are assets that do not have a privileged status, but give the investor voting rights. In this case, the buyer gets the opportunity to participate in the life of the company: express his point of view at shareholder meetings and make decisions regarding the company’s activities.
It is worth noting that not all preferred securities guarantee voting rights, so if you want to influence the direction of development of the enterprise, you must pay attention to this aspect when purchasing securities.
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Types of preferred shares
Everything is more complicated here - such securities differ from ordinary ones and from each other. Different types of assets guarantee their owners different benefits and rights: expanded participation in shareholder meetings, exchange of assets, accumulation of unpaid dividends, additional income and others. Let's look at each type in detail:
Golden shares
- These are assets exclusively owned by the government of a country or municipality. Used for state control over enterprises. An example is any state corporation (Gazprom, Sberbank). The owners of such securities (that is, the governments of countries) have a decisive vote on issues key to the development of enterprises: reorganization, changing the size of the authorized capital, concluding transactions. At the same time, the company is not directly controlled by members of the state apparatus - a special commission is appointed. Her competence includes managing the company.
Participation promotions
– give the holder the right to receive additional income, in addition to payments of main dividends. This is achieved by double distribution. As with other preferred assets, their owners receive a set annual income. In addition to this, such securities participate in the distribution of free profits on the same basis as ordinary ones. That is, if the board of directors of a joint-stock company decided to pay dividends to holders of ordinary securities of the company, holders of participation shares will receive both these payments and the annual payments due.
Cumulative preferred shares
– these are assets that give the right to accumulate unpaid dividends. Let's say that last year the company was not doing as well as usual. The board of directors decides not to pay any dividends due to security holders. Owners of cumulative shares still win in this case - they will receive the funds in full the next time the financial situation in the company improves. Moreover, payments to the owners of such assets are a priority - first the company pays them, and then everyone else.
Convertible
. These assets can be freely converted into ordinary or preferred, but of a different type. The exception is that you cannot make a bond out of such paper. Example: a company has shown good financial results for several years in a row, and the growth trend is expected to continue in the future. In this situation, it is convenient to own participation shares, so you change convertible shares to this type. This will allow you to participate in the distribution of free profits between holders of ordinary assets, and receive a fixed income guaranteed by your privileged status. In the opposite situation, you can exchange assets for cumulative ones.
Shares for redemption.
Here the principle of operation is similar to bonds - the joint-stock company can buy them back from the owner and thus return the costs to him. Another thing is that the value of the securities may change to a lower value, and dividends may never be paid. Therefore, the purchase of such assets should be approached as carefully as possible.
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Portfolio and portfolio shares
Any sufficiently competent private investor knows that keeping all of your capital in the shares of just one company is quite risky, therefore, for this purpose, each investor forms a portfolio. A stock portfolio is the total collection of all securities owned by one specific investor (legal entity or individual).
Thus, portfolio shares are any of the previously discussed types of shares that are in the investor’s portfolio. The exception is treasury and quasi-treasury shares, since it is by definition impossible for an investor to take possession of them.
The investor himself determines the liquid portfolio shares and calculates their total return. With the correct distribution of capital, portfolio shares within portfolios allow you to beat many risks, since if some of the shares in the portfolio do not bring profitability, then the investor will receive profit from shares of other joint-stock companies.
The concept of “shares” in simple terms
A share (from the English “stock”) is an equity security that gives property rights to a part of the company.
It gives the shareholder the right to own a share of the company in proportion to its entire capitalization.
Shareholders are not liable for the obligations of a joint stock company (JSC) and bear the risk of losses associated with its activities only to the extent of the value of the securities they own.
Shares are an issue-grade security. They appear on the stock exchange during the IPO (IPO) process, which translates as the initial placement of securities, entry into the secondary market. The issuance process takes from 1 to 3 years, after which trading of these shares becomes available on the stock exchange for everyone.
Note Only a small proportion of companies participate in the auction, since most businesses are not joint stock companies, and those that are are not large enough to be listed.
What rights do shareholders have:
- Receipt of dividends (determined by the company's dividend policy). During difficult economic periods, profits fall and therefore payments may not be made;
- Participation in annual general meetings of shareholders (AGM);
- Receiving part of the money from the sale of company property during its liquidation;
I recommend reading the following material:
- What are company shares - a detailed overview;
- How to buy shares for individuals;
- How to make money on stocks;
- How to buy foreign securities;
- Investing in shares - how to do it right;
- Buyback - what is it;
- What does the price depend on?
- Stocks and Bonds for Beginners;
