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What does it mean to buy shares in a company

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What is a share?

  • A share represents a piece or part of a company. Shares can be unlisted (privately held and traded) or listed (traded on a stock exchange).
  • A stock exchange is a formal market where shares in a company that is listed can be boug​ht and sold, for example the Namibian Stock Exchange, the JSE or the New York Stock Exchange.
  • When a company wants to raise capital, for example to expand, it can offer a portion of the company, in the form of shares, to investors.

What does an investment in a share/company mean?

  • When buying a share in a company, the investor becomes a part owner of the company and thus becomes a shareholder of the company.
  • When owning a share in a company, you become entitled to a part of the company’s assets and profits.
  • Shareholders share in the profits through dividends that are declaredand paid by the company.

What are earnings per share and dividend per share?

  • When a company makes a profit, it can either re-invest the profit into its business to increase future profits or it can pay out the profits to shareholders in the form of a dividend. 
  • Companies normally do a combination of reinvesting and declaring dividends, by paying out a certain percentage of the profits to shareholders and retaining the balance.
  • A dividend per share is declared by the company, typically twice a year by listed companies. This is referred to as an interim dividend and a final dividend.
  • The amount of dividends paid by a company depends on factors such as company performance, company cash requirements and dividend policy.
  • The shareholder will receive the dividend per share (normally referred to as DPS) for every share they own. Using the above example, if the company declares an interim DPS of N$0.30 and a final DPS of N$0.30, the investor that owns 10 shares will receive a total dividend for the year of N$6.00.

How do I make a return on my investment in shares?

  • A shareholder’s total return on his investment will consist of any change in the share price (capital gain or loss) and dividends received. Share prices can fluctuate, which will result in a capital profit or a capital loss.
  • The price movement of a share (either up or down) is influenced by various factors, including but not limited to company performance, economic conditions, investor perceptions, market expectations, etc.
  • The amount of dividends paid by a company depends on factors such as company performance, company cash requirements and dividend policy.

Benefits and Risks and of investing in shares:

  • Any investment into shares should be viewed as a long-term investment with an investment horizon of 7 years or more, as a longer investment horizon can mitigate possible risks.
  • There are no guaranteed investment returns and there is even a possibility of capital loss, as share prices can go up (capital profit) or down (capital loss).

​Benefits

  • Inflation hedge – investments in shares provide a hedge against inflation (based on historical returns). 
  • Liquid investment – Shares can be traded and turned into cash.
  • Capital gains made on investments in shares are not taxable in Namibia for individuals.
  • Shareholders receive Income from dividend payouts.

Risks

  • The price movement of a share (either up or down) is influenced by various factors, including but not limited to company performance, economic conditions, investor perceptions, market expectations, etc.
  • There is a risk that the company might underperform, and the return on investment might not be as rewarding as the investors believed it would beas rewarding as the investors believed it would be.

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