• Home
  • Articles
  • Guide to shares: What you need to know before you invest

Guide to shares: What you need to know before you invest

Laptop phone

29 Oct 2018 | 5 min. read

Get an understanding of what shares are and how they work before you start investing in them.

Key takeaways

  • Shareholders earn returns when they receive dividends or if they sell their shares when the price of the shares gain in value.
  • A company's share price will be affected by market fluctuations. It could come under pressure if the company gets into serious financial difficulties.

What are shares?

A company offers its shares to investors to raise money. The company may need such funds for reasons such as to grow its business, acquire new assets or to remain solvent.

How it works

When you buy a company’s shares, you become a shareholder of the company.

Shareholder's returns: Dividends and capital gains

As shareholder, you may earn returns when you receive dividends or if you decide to sell your shares above the price you bought them at.

However, a company may not have sufficient profits to pay out dividends, or may choose not to pay out dividends. For example, the company may choose to re-invest profits generated into their business instead of paying out dividends.

Where a company’s shares are listed on a stock exchange, its price may rise or fall depending on:

  • Economic and market conditions
  • Industry and company specific conditions (e.g. the company’s growth prospects, future earning potential, etc.)

However, not all shares react in the same way to the same set of economic, market or business conditions.

Classes of shares

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.

See also: Guide to shares: Dual class shares

Your rights as a shareholder

Ordinary shareholders have a right to attend and vote at general meetings.

If the company you have invested in is wound up or liquidated, you are entitled to any assets that remain after all liabilities (e.g. debt owed to creditors) of the company have been paid.

What’s the most you can lose?

Apart from market driven price fluctuations, a company's share price will be under pressure if the company performs badly 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.

Trading halts or suspensions

Listed companies may also request a trading halt or trading suspension for the purpose of disseminating material information to the investing public.

The Singapore Exchange (SGX) may also suspend trading of a company’s shares in certain circumstances. When a company’s shares are subject to a trading halt or trading suspension, you will not be able to buy or sell the company’s shares through the stock exchange.

As an investor, you should not overlook rights issues and other corporate actions.

Corporate actions

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.

The company listed on the SGX will make an announcement of any proposed corporate action. Depending on the type of corporate action (e.g. rights issue or a major acquisition), the listed company will also provide shareholders with a circular containing information on the corporate action.

You can find such announcements and circulars on SGX’s website.

Where shareholders’ approval is required, you may be asked to attend a general meeting to vote (or to vote by proxy) on the listed company’s proposed resolutions. You should take the time to read and understand any documents provided by the listed company before attending such general meetings to vote, or voting by proxy.

Rights issues: how they affect you

In a rights issue, the company gives existing shareholders the right to purchase newly-created shares within a specified time period, usually at a discount to the current trading price.

The proportion of new shares that shareholders can purchase is in proportion to their existing shareholdings.

Advantages Disadvantages

Shareholders can buy shares at a discounted price.

  • If you don't want to invest more money into the company, it will mean that your existing holdings are diluted.
  • The company’s earnings per share (EPS) will decrease, since there are more shares after a rights issue exercise.

It might seem that being able to buy additional shares in a company you're already vested in is a good deal. But before deciding what to do with your rights, you should understand the company’s plan for spending the money raised, and evaluate what it means for its future prospects.

General meetings

Ordinary shareholders have a right to attend and vote at general meetings on matters such as major acquisitions or disposals, or the appointment of directors.

A general meeting provides a forum for you to engage the company’s board or senior management, and voice your views on matters affecting the company.

If you are unable to attend a general meeting, you can vote by proxy by following instructions provided by the company.

Common terms

Here are a few common terms you might encounter if you're investing in shares:

Companies seeking to list on the SGX normally make an initial public offering (IPO) of its shares. You can subscribe to an IPO through internet banking, bank ATMs or hardcopy subscription forms. In connection with the offering, the company has to prepare a prospectus that is registered by MAS.

[/accordion-inner]
Blue chips, growth stocks, cyclical stocks etc.

Shares are often sorted into categories based on the characteristics they have. Some shares may be referred to as blue chips (big, stable companies with strong track records), or be perceived to have growth or cyclical tendencies.

Such categorisation is based on market convention and may change over time.

Market capitalisation

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.

Checklist

Are shares suitable for you?

Share investing may not be suitable for everyone. Before you invest, make sure that you:

  • Are familiar with or clear about the factors and scenarios that can affect share prices
  • Understand the risks associated with shares
  • Want potentially higher returns BUT are also prepared for risks which include the risk of losing a substantial part or all of your investment
  • Can build a sufficiently diversified portfolio of assets (to avoid being overly concentrated in a few types of shares or asset classes)
  • Are 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)
  • Have the time and resources to monitor the markets, corporate performance as well as react to corporate actions such as rights issues

See also: Guide to shares: How to invest

Last updated on 07 Nov 2018