Shares



What are shares? 

Shares are issued by companies to raise capital or financing from investors. When you buy a company’s shares, you become a shareholder of the company. Shareholders are usually entitled to a share of any dividends that are declared and paid. If the company you have invested in is wound up or liquidated, you are entitled to any assets that remain only after the company’s creditors have been paid.

There are broadly two classes of shares – ordinary or common shares and preference or preferred shares. In this guide, we use “shares” to refer to ordinary shares.

Ordinary shareholders have a right to attend and vote at general meetings on matters such as a major acquisition/disposal or the appointment of directors. A general meeting provides a forum for you to engage the company’s board/senior management and voice your views on matters affecting the company.

Shares are mostly traded in board lots of 100. If a share is priced at $1, you would pay $100 to invest in one lot of shares (excluding transaction costs).

Some investment products have been categorised as Specified Investment Products (SIPs). Currently, all investment products listed on a foreign exchange are categorised as SIPs. With effect from October 2012, some of these products will not be considered as SIPs provided they meet certain requirements. For information on the requirements in place when transacting SIPs, read our consumer guide.

Foreign listed products – risks

Foreign listed products expose you to additional potential risks due to legal and regulatory differences between the foreign regime and the local regime. For example, there may be differing disclosure standards and investor protection.

Foreign exchange risk and tax liabilities may also be present. You should be aware that political, economic and social factors in the foreign country may influence the domestic market and impact the value of the investment. The extent of risks will also differ depending on the jurisdiction in which the foreign product is listed. Make sure you are familiar with the different risks and that you are prepared to undertake those risks before investing.

What is the return?

Shareholders earn returns when they receive dividends and if they decide to sell their shares when the price of the shares gain in value. Dividends are paid out of the company’s profits. Not all the profits may be distributed. Companies may choose to re-invest profits generated from their operations into their business. A company’s share price reflects, amongst others, its growth prospects and future earning potential.

Why invest in shares?

Investors buy shares in the expectation that the share price will rise. Some may also buy shares as a hedge against inflation or for dividend income.

What is the maximum amount you can lose? What is the worst that can happen when you invest in shares? 

Apart from market driven price fluctuations, a company’s share price will be under pressure if the company performs badly and / or gets into serious financial difficulties. Shareholders bear more risk than bondholders and other creditors if the company fails and is wound up. When this happens, they rank behind all creditors before they are able to receive any assets that have not already been exhausted to pay creditors. In the worst case scenario, a shareholder may lose up to the amount invested in the company.

Other risks include companies requesting for a trading halt or trading suspension for the purpose of disseminating material information to the investing public. SGX may also suspend trading of a company’s shares in certain circumstances.

As an investor, you should not overlook rights issues and other corporate actions. Also, some investors use margin financing when trading shares. Leverage trading can be risky and can lead to unlimited losses depending on the positions you take.

Are shares suitable for everyone?

Share investing may not be suitable for everyone. For example, shares may not be suitable for you if you:

  • Are not familiar with or are unclear about the factors and scenarios that can affect share prices;
  • Do not understand the risks associated with shares;
  • Want potentially higher returns but are not prepared for risks which include the risk of losing a substantial part or all of your investment;
  • Cannot build a sufficiently diversified portfolio of assets (avoid being overly concentrated in a few types of shares or asset classes)
  • Are not prepared to leave your money tied up for long periods of time (a longer investment horizon is generally preferred to weather short term price fluctuations for potentially longer term gains);
  • Do not have the time and resources to monitor the markets, corporate performance as well as react to corporate actions such as rights issues.

What makes share prices move?

Share prices are driven by economic and market conditions, as well as industry and company specific conditions. Much of the price movement of a share may be explained by how the overall market is performing. But not all shares react in the same way to the same set of economic, market or business conditions.

What are blue chips, large caps, growth or cyclical shares?

Shares are often sorted into categories based on the characteristics they have, for example some shares may be referred to blue chips, or be perceived to have growth or cyclical tendencies. Such categorisation is based on market convention and may change over time.

A company’s market capitalisation is the total market value of its shares. Shares may also be sorted by market capitalisation, for example, small caps, mid-caps and large caps. What constitutes a small, mid or large cap depends on the particular market you are interested in. Stocks with smaller market capitalisation may be newer companies, and not very well-researched.

How do you select shares for investing?

Be clear about your investment objectives first, that is whether you are building up capital or looking for income, and how much risk you are prepared to take. This will help you narrow down your search.

Investors may use fundamental analysis or technical analysis or a mixture of both when deciding which shares to invest in.

Before investing, make sure you are familiar with the company including its business operations, whether it has a steady growth outlook, the industry it is in, its financial performance, corporate governance, whether there are any weaknesses and other factors which could affect its performance and share price.

Beware of investing in shares or any other investment product based on hot tips or rumours.

Where can you get information to monitor your shares?

You can get live trading prices from the SGX website.

There are on-going disclosure requirements if the shares are listed on SGX. Under SGX Listing Rules, companies are required to announce all material information via SGXNET. Companies are also required to announce their full year and interim financial results.

Your broker may also provide research and analysis on the shares you are interested in.

Do keep track of the company’s performance, its business and the performance of the industry it operates in by reading announcements, annual reports, and shareholders’ circulars or other documents issued by the company. 

Dividends, share placements, rights and bonus issues and other important things you should know

Companies may carry out various corporate actions such as bonus or rights issues and share buybacks. As a shareholder, you should find out how these corporate actions will affect you.

What is an IPO?

Companies seeking to list on SGX normally make an initial public offering (IPO) of its shares. In connection with the offering, the company has to prepare a prospectus that is registered by MAS.

Read the prospectus carefully to obtain an understanding of the company including its business operations, vulnerabilities, financial performance, corporate governance and other important aspects. You can access the prospectus through SGX and MAS OPERA websites.

How do you get started?

Before you can start trading, you will need two accounts: a securities account with the Central Depository (Pte) Ltd (CDP) and a trading account with a stockbroking member of SGX-ST. The securities account is required for the settlement of trades. It maintains all the shares you’ll buy on SGX, and electronically records the movements of the shares in and out of your account as you buy and sell them. The trading account allows you to trade shares in the stock market. Both these accounts have to be linked before you can start trading.

What are the fees and charges involved?

You would need to pay brokerage commission to your broker. The commission is usually based on a percentage of the investment amount. In addition to brokerage commissions and other charges imposed by brokers, there is a CDP clearing fee and SGX trading access fee. Please note that GST is payable on all fees.

Concerns about company

If you are a shareholder and have some concerns about the company’s compliance with SGX’s listing rules, or about possible market misconduct, you may wish to contact SGX. SGX is the frontline regulator of listed companies and is required to administer a sound regulatory framework to maintain a fair, orderly and informed market.

Alternatively, you may wish to make your views known at the company’s Annual General Meeting.

Key questions to ask or considerations before investing in shares

 

Consider the suitability of an investment in shares in light of your own circumstances. In particular, you should consider whether you:

  • have sufficient knowledge and experience to make a meaningful evaluation of the merits and risks of investing in shares;
  • have access to, and knowledge of, appropriate analytical tools to evaluate the investment in the shares and how such investment will impact your overall investment portfolio;
  • have sufficient financial resources and liquidity to bear all the risks of investing in shares, including the risk of losing all or a substantial part of your investment;
  • are able to monitor or evaluate (either by yourselves or with the help of a financial adviser) changes in markets, economic or other conditions that may affect the issuer or trading in the shares.

 

The above information is prepared in collaboration with the Association of Banks in Singapore, Investment Management Association of Singapore and Securities Investors Association (Singapore).