What are stocks and how to make money on them: a beginner's guide for the investor.

A share is a security that gives its owner the right to participate in the management of the company and receive a portion of its profits.


In simplified terms, it looks like this: a company needs money for development, so it applies for help from investors, who give the necessary amount of money. In return, they receive a certain share of the company, expressed in shares.


The total nominal value of the shares must be an amount equal to the share capital of the company. Investors can be both individuals and legal entities, and their share in the share capital is determined by the ratio of the number of the company's securities in ownership to the total amount of its shares. The company returns a portion of the annual profit to its shareholders in the form of dividends - a kind of gratitude for financial support.


Types of stock


There are ordinary shares and preference shares. A company may issue both of them or limit itself to ordinary shares only. The volume of preferred securities may not exceed 25 percent of the total number of shares. The difference between these two categories lies in the way the profit is earned and the opportunity to influence major decisions of the company.


Ordinary shares give the investor the right to participate in the general meeting of shareholders, the supreme management body of the joint-stock company. The payment of dividends on such shares is not guaranteed and takes place only after the distribution of bonuses among the owners of preferred shares.


Owners of preference shares do not participate in managing the company (except for making decisions on reorganization or liquidation of the company), but the size of their dividends is higher than that of the holders of ordinary securities.  The ratio of bonuses on ordinary and preferred shares is fixed in the charter of the company. Besides, it is the preference shares that have the primary right to receive payments at the end of the year.


The total number of securities owned by one shareholder also provides additional advantages:

- 1% of the shares makes it possible to review the list of other shareholders.

- 2% of the shares allow to introduce issues into the agenda of the general meeting of shareholders and propose candidates for the board of directors and the auditing committee.

- 10% shares entitle the holder to call an extraordinary shareholders' meeting and have it audited.

- 25% + 1 share is a blocking stake. It allows to reject at a general meeting of the decisions that require the consent of 75% of shareholders (amendments and additions to the charter, reorganization and liquidation of the company, as well as other issues related to the declared shares and the redemption of already outstanding).

- 50% + 1 share - the controlling stake, which gives the holder the right to independently decide on all other matters discussed at the General Meeting of Shareholders.

- 75% + 1 share gives the holder the ability to make any decisions on the management of the company.


How to earn with shares

It is clear that the average market participant does not have a sufficient number of securities to directly or indirectly influence the fate of the company. However, he does not need it either, because the main objective of share purchase is to make profit. There are two ways to make money: receiving dividends or income from the difference between the buying and selling price of the shares.




The source of payment of dividends is the company's net profit, i.e. the amount remaining after tax. The amount of dividends is determined at the end of the fiscal year (in some cases, quarter, half-year, or nine months) by the board of directors, and then the decision is submitted to the shareholders' meeting for consideration. Shareholders can approve the proposed payments or reduce them if they feel that the company needs more funds for successful development. Investors on the shareholder register as of the reporting date are entitled to receive dividends. This date cannot be set earlier than 10 or later than 25 days after the decision to pay.


The procedure and term of payment of dividends are determined by the company's articles of association or by decision of the shareholders' meeting. For ordinary holders of shares, this period shall not exceed 25 business days from the date of determination of the circle of persons entitled to receive dividends.


The person representing the interests of the investor - the nominee holder and the trustee registered in the shareholder register - will receive their funds no later than 10 days from the same moment. During this period, the dividends in cash are sent to the recipient by postal order or transferred to his bank account.

Exchange rate difference

You can earn extra income when trading securities. You make money on the difference between the cost of buying and selling - you buy cheaper and sell dearer. For trading makes sense to choose common shares: their liquidity (the ability to be easily bought and sold) is higher than that of preferred shares. It's worth remembering that when the register is closed, the value of the securities falls by about the amount of dividends paid. If you want to buy shares, this is a good time, while to sell it is better to wait from a couple of months to six months: the share price usually returns to its previous level or even exceeds it.


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