Shares bonds and debentures issued by companies are considered investment instruments for investors. Each of these investment instruments used as a source of investment has its own characteristics, advantages, and disadvantages.
Investors’ expected returns and risks from these investment instruments differ. As a result, an investor needs to know in detail about the various aspects of each investment instrument before taking an investment decision. In this blog, we will learn more about these investment tools from an investor’s perspective.
Introduction Share Bond and Debenture
An investor can invest his money in various sectors. Think, your father has 10 lakh rupees. He can keep this ten lakh rupee as a fixed deposit in a bank if he wants or he can invest the said money in any one or more of the ordinary shares, preference shares, bonds, and debentures issued by any company.
Each of them has its own identity as an investment sector. Each of them has different returns and risks to the investor. The following paragraphs discuss the characteristics, pros and cons, and comparative judgment of each of them as investment sectors.
Classification of Shares:
Public Limited: An important source of raising funds or capital for companies in the sale of shares. A share is a small part of a large amount of capital. Small investors are interested in investing by buying shares.
Companies issue different types of shares to attract investors. Various types of shares are discussed below:
Common Shares
The capital of a large number is divided into smaller parts and sold as shares. After collecting the minimum capital with the permission of the government, the public is asked to purchase shares by printing a prospectus through newspapers giving an idea about the company. Shares are distributed through lottery if there are many applications. As a result, small investors can also participate in the investment by buying shares.
They are the real owners of the company. The profits earned by the organization are distributed among the shareholders as dividends.
In case of need for liquidity, shareholders can sell their shares in the secondary market (ie: Dhaka Stock Exchange) and profit there if the price increases. Generally, in the case of profitable companies, shareholders receive dividends on a regular basis. However, no fixed rate of dividend payment is predetermined. It is also not mandatory for the company to pay dividends. Dividends are generally not paid unless there is a profit.
In case of need for liquidity, shareholders can sell their shares in the secondary market (ie: Dhaka Stock Exchange) and profit there if the price increases. Generally, in the case of profitable companies, shareholders receive dividends on a regular basis. However, no fixed rate of dividend payment is predetermined. It is also not mandatory for the company to pay dividends. Dividends are generally not paid unless there is a profit.
The entire amount of profit is not distributed as dividends even if it is a profit. The company can pay dividends at any rate it wants, or not pay dividends. But in that case, if the desired amount of dividend cannot be paid to the shareholders, the share price in the secondary market decreases, which is not good for the company.
Buying shares is a risky investment for investors. Companies issuing shares are not always obliged to pay dividends to shareholders. If the company does not make enough profit in any year, no dividend is paid to the shareholders.
Again, after satisfying the claims of all creditors and preference shareholders from the proceeds from the sale of assets during the winding up of the company claims of shareholders are satisfied. As a result, if there is no money left over after all claims are settled, common shareholders risk getting nothing for their invested money. For these reasons, investing in common shares is considered a relatively risky investment.
However, as a risky investment, the income potential from such shares is also high. Common shares can be considered a good investment source for an investor if invested wisely.
Common shares have certain characteristics as an investment vehicle. They are described below:
Common shares give the investor ownership of the company. As a result, the company as the owner has legal rights over its earned profits and assets.
b) Ordinary shares give its owners full power to control the company. Shareholders control the company by exercising their voting rights in making important decisions.
c) Ordinary shares are easily transferable. The investor can transfer the shares held by him at any time. Common shares have certain advantages and disadvantages as an investment vehicle.
Advantage
A) High Income: Common shares can be a good source of income for an investor if invested judiciously. Other investment instruments such as preference shares, bonds, and debentures have fixed incomes. But income from common shares is not fixed. As a result, if the company earns more, the income received by the investors also increases.
b) Limited Liability: The common shareholders jointly bear the risk of the company. In no case does an investor’s risk exceed the amount invested. For example, suppose an investor buys 100 shares of a company worth Rs 10, so his liability can be up to Rs 10 x 100 = Rs 10,000.
c) Liquidity: Common shares are regarded as liquid assets by investors. The investor can collect cash by selling the shares he holds at any time.
However, the liquidity of all company shares is not equal. Usually, the shares of big and good companies are more liquid than other companies.
Difficulty
Risk: Investment in common shares is riskier. There are many speculative investors in the stock market, so there is a risk of loss if you do not invest wisely.
b) Rights to the distribution of profits and assets: In the distribution of company profits, the owners of ordinary shares have the right to the remaining profits after payment of the income due to the owners of preference shares, bonds, and debentures.
Similarly, after paying off all the liabilities of the company from the proceeds of the sale of the assets during the liquidation of the company, the remaining money is shared by the shareowners. That is, in both cases the claims of preference share, bond, and debenture holders are considered to be superior to the claims of ordinary shareholders.
Preference share
Preference shares are considered a good investment tool for investors who expect a fixed rate of return from investing in shares. However, the number of preference shares is not very high in our country. Like ordinary shares, preference shares have their own characteristics and features.
a) Ownership: Owners of preference shares are not said to be full owners of the company. They are considered to be intermediate between ordinary share holders and bond and debenture holders.
b) Convertibility: Many preference shares have an option to convert into ordinary shares after a certain period of time. As a result, investors can use this opportunity to own common shares if they wish.
Preference shares have certain advantages and disadvantages from an investor’s point of view. The advantages and disadvantages of preference shares are discussed below:
Convenience
Income at a fixed rate: Preference share holders get dividends at a fixed rate. As a result, the uncertainty of the income of shareowners is less.
b) Priority on Profit Income: Priority in payment of dividend Shareholders get priority before payment of dividend to ordinary shareholders.
Difficulty
c) Claims on Assets: Claims of preference shareholders on assets in case of winding up or dissolution of the company are considered before claims of ordinary shareholders. However, after the demand of the debenture holders, their demands are met.
Control: Preference shareholders have no voting rights. As a result preference share owners have no control over the company.
b) Limited income: Preference shareholders have a fixed rate of income. As a result, if the company makes an excess profit, the preference share owners do not get any part of it.
Deferred Surfaces
Right share
Bonds
d) Convertibility: Companies often sell convertible bonds to investors. In this case, the bondholders can convert their holdings of bonds into a specified number of common shares as per the conditions mentioned in the bond.
Advantage
Disadvantage
Debentures
Advantages and Disadvantages of Debentures
Advantage
Disadvantage
The stock market of Bangladesh
Common shares, mutual funds, debentures, bonds, etc. of various companies are bought and sold in the mentioned two exchanges. Company shares listed on the stock exchange are divided into classes A, B, G, N, and Z, etc. to facilitate investors’ investment decisions.
Indicators are generally used to understand the movement or overall condition of the stock market. For example in Dhaka Stock Exchange:
a) DSE Broad Index
b) DSE Shariah Index and
c) Three indices called DSE 30 Index are used.
Similarly in Chittagong Stock Exchange:
A) CSE All Shares Price Index
b) CSCX Index (CSE Selective Categories Index) and
C) CSE 30 Index (CSE 30 Index) has three common indices.
Stock market indices fluctuate daily. These fluctuations give information about the movement or direction of the market. The fluctuation of this index depends on the fluctuation of the share price of the companies listed in the stock market. When the price of most shares increases, the index increases, and when the share price of most companies decreases, the index decreases.
Method of investing in shares
Investors can invest in the stock market in two ways. Namely:
A) Through Primary Market
b) Through the secondary market.
A) Primary market: Primary market refers to the market in which the company makes its initial public offering. When a company sells its shares in the market for the first time, it is called an initial offer. When an investor participates in a company’s initial public offering and purchases shares, he is considered to have purchased shares in the primary market.
b) Secondary market: Investors can buy and sell shares among themselves after the company sells shares to investors for the first time. The market where investors buy and sell shares among themselves is called the secondary market.
Dividends and dividend policy
A company’s earned profits or profits are income due to shareowners. The resulting profit or gain is distributed among the shareowners. Usually, the company does not distribute the entire share of the profits or profits earned among the shareholders.
Reserves a portion of profits to fund future business operations and distributes the remainder to shareholders. The portion of the profit that is distributed among the shareholders is called a dividend.
Companies can generally pay dividends in two ways.
A) Cash dividend
b) Stock dividend or bonus share
a) Cash Dividend: A dividend that is paid in cash is called a cash dividend. For example: Suppose a company declares a 10% cash dividend. A shareholder holds 500 shares of the company for Rs 10 each. The person will get Rs 5,000×10% or Rs 500 as a cash dividend.
b) Stock dividend: Companies sometimes pay stock dividends instead of cash dividends or stock dividends along with cash dividends. Companies generally pay stock dividends at a rate proportionate to the number of shares currently issued. As a result, the number of shares of the company increases.
Suppose a company currently has 1 crore shares of Rs 10 each. The company declares a stock dividend in the ratio of 50 percent or 2:1. As a result, if an investor currently has 500 shares, after receiving the stock dividend, the number of shares will be 750. Similarly, the total issued shares of the company will be 1.5 crores.
Dividend policy
Every year the company has to take various decisions regarding dividends. For example: How much of the profit earned will be given as dividend, cash dividend, stock dividend, etc. Each company has specific policies for making these decisions, which can guide the company is paying dividends.
These principles are called dividend principles. Generally, three types of dividend policies are observed. namely-
a) Fixed Tk Dividend Policy: According to this policy, an equal amount of Tk dividend is given every year from the profit earned. For example: If a company pays a dividend of Rs 10 per share every year, it is called a stable dividend policy. No matter how high the earnings per share are, the company pays dividends equal to the dividends paid in previous years. However, this method usually does not reduce the number of dividends.
b) Dividend Payout Ratio Policy: According to this policy, the company decides how much part of the income will be paid as a dividend every year. As per the decision the company pays the dividend every year at a proportionate rate.
For example, suppose a company sets a dividend payout ratio of 50%. As a result, if the company’s earned income is Tk 2 crore in a year, then the company will pay Tk 2 crore × 50% or Tk 1 crore as a dividend to the shareholders.
c) Fixed Dividend with Additional Dividend Policy: This is an ideal dividend policy for companies whose earnings are not stable or regular. As per this policy the company pays additional dividend every year along with a minimum stable dividend. Many companies follow this dividend policy as it is more flexible than other dividend policies.
Conclusion
We hope that this blog explained to you the basics of share, bond, and debenture. Now it’s time for you to go ahead and invest in these financial products. All three offer potential returns of up to 36% per year on average. You can also earn additional benefits by holding onto your stake for longer periods of time.
