The good news is that you probably don`t need to worry about alternative investments at the start of your investing career. They are generally high-risk/high-reward securities that are much more speculative than plain old stocks and bonds. Yes, there is the opportunity for big profits, but they require some specialized knowledge. So if you don`t know what you are doing, you could get yourself into a lot of trouble. Experts and professionals generally agree that new investors should focus on building a financial foundation before speculating. For more on how levels of risk correspond to certain investments
DIFFERENT TYPES OF SHARES There are different types of shares. 01.Equity Shares, 02. Preference Shares, 03. Deferred shares, 04. Debentures, 05. Bond
01. EQUITY SHARES These shares are also known as ordinary shares. They are the shares which do not enjoy any preference regarding payment of dividend and repayment of capital. They are given dividend at a fluctuating rate. The dividend on equity shares depends on the profits made by a company. Higher the profits, higher will be the dividend, where as lower the profits, lower will be the dividend.
02. PREFERENCE SHARES Preference shares: These shares are those shares which are given preference as regards to payment of dividend and repayment of capital. They do not enjoy normal voting rights. Preference shareholders have some preference over the equity shareholders, as in the case of winding up of the Company, they are paid their capital first. They can vote only on the matters affecting their own interest. These shares are best suited to investors who want to have security of fixed rate of dividend and refund of capital in case of winding up of the company. These are other type of shares. The preference shares are market instrument issued by the companies to raise the capital. Preference shares have the characteristics of both equity shares and debentures. Fixed rate of dividends are paid to the preference share holder as incase of debentures, irrespective of the profits earned company is liable to pay interest to preference share holders.
Types of Preference Shares Preference shares are divided into: 1. Cumulative & Non cumulative shares 2. Redeemable & Non-redeemable shares 3. Convertible & Non-convertible shares 4. Participating and non-participate shares
1. Cumulative & Non cumulative shares Suppose a company does not make any profits for two successive years and makes huge profits in the third year. Then the people who have cumulative shares will get the interest of the three years and in case of non-cumulative share holders they do not receive the interest of past two years.
2. Redeemable & Non-redeemable The redeemable shares are redeemed within the life time of the company or before the company closes down or to say that these shares have a maturity period. In case of non-redeemable shares they mature only upon closing down of the company.
3. Convertible & Non-convertible shares Classes of shares which can be converted to other forms of shares or securities are called as convertible shares. Whether they are converted to Equity Shares, Debentures depend on the rules laid down by the company. If the shares are not convertible to any other security on their maturity period are called as non-convertible shares.
4. Participating and non-participating A company goes bankrupt and is dissolved. Now its assets are sold and liabilities are paid up. First debenture holders are paid then preference share holders and at last the equity shareholders. After paying up each one of them still there is some surplus amount left now if the investors have participating preference shares then the surplus amount left will be distributed equally between equity share holders and participating share holders. These are very less preferred in the market because the investor is looking out for long term investment and good return
03. DEFERRED SHARES These shares are those shares which are held by the founders or pioneer or beginners of the company. They are also called as Founder shares or Management shares. In deferred shares, the right to share profits of the company is deferred, i.e. postponed till all the other shareholders receive their normal dividends. Being the last claimants of the profits, they have a considerable element of speculation or uncertainty and they have to bear the greatest risk of loss. The market price of such shares shows a very wide fluctuation on account of wide dividend fluctuations. Deferred shares have disproportionate voting rights. These shares have a small denomination or face value. Deferred shares are not transferable if issued by a private company. Deferred shareholders do not enjoy the right of priority to have shares offered in case of the issue of shares by the company. If the company goes into liquidation the deferred shareholders can get refund of capital and participate in the surplus capital, if any, after the rights of preference and equity shareholders have been satisfied.
04. BONUS SHARES The word bonus means a gift given free of charge. Bonus shares are those shares which are issued by the company free of charge as bonus to the shareholders. They are issued to the existing shareholders in proportion to their existing share holdings. It is a kind of gift to the shareholders from the company. It is bonus in the form of shares instead of cash. It is given out of accumulated profits and reserves. These shares have all types of preferences which are available to the existing shares. For example. Two bonus shares for five equity shares. The issue of bonus shares is also termed as capitalization of undistributed profits. Bonus shares are a type of windfall gain to the equity shareholders. They are advantageous to the equity shareholders as they get additional shares free of cost and also they earn dividend on them in future.
Conditions for issue of bonus shares:
- Sufficient amount of undistributed profits: There must be sufficient amount of undistributed profits for the issue of bonus shares.
- Provision in the articles: There must be a provision in the articles of association regarding the issue of bonus shares. If there is a provision in the articles regarding the issue of bonus shares the company can issue bonus shares if there is no provision, the company cannot issue the bonus shares.
- Suitable Resolution: The Board of Directors must pass a suitable resolution in the Board meeting for the issue of bonus shares.
- Shareholders approval: The shareholders must give formal approval for the issue of bonus shares in the Annual General Meeting.
- When a company can issue: A company can issue bonus shares only twice in a period of five years.
- Fully paid up shares: Bonus shares can be issued only when the existing shares are fully paid up. `Money Market` A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos). The money market is used by a wide array of participants, from a company raising money by selling commercial paper into the market to an investor purchasing CDs as a safe place to park money in the short term. The money market is typically seen as a safe place to put money due the highly liquid nature of the securities and short maturities, but there are risks in the market that any investor needs to be aware of including the risk of default on securities such as commercial paper. Money market investing carries a low single-digit return, and when compared to stocks or corporate debt issues, the risk to principal is generally quite low. However, there are a number of positives and negatives that all investors should be aware of when it comes to the money market. In this article, we`ll take a look at these ups and downs, and show you how the downs can greatly outweigh the ups. The Positives 1. A Great Place to Park Money When the stock market is extremely volatile and investors aren`t sure where to invest their money, the money market can be a terrific safe haven. Why? As stated above, money market accounts and funds are often considered to have less risk than their stock and bond counterparts. That is because these types of funds typically invest in low-risk vehicles such as certificates of deposit (CDs), Treasury bills (T-bills) and short-term commercial paper. In addition, the money market often generates a low single-digit return for investors, which in a down market can still be quite attractive. 2. Liquidity Isn`t Usually an Issue Money markets funds don`t generally invest in securities that trade minuscule volumes or that tend to have little following. Rather, they generally trade in entities and/or securities that are in fairly high demand (such as T-bills). This means that they tend to be more liquid, and that investors can buy into them and sell them with comparative ease. Contrast this to, say, shares of a mid-cap biotech company. In some cases those shares may be highly liquid, but in most the audience is probably very limited. This means that getting into and out of such an investment could be difficult if the market were in a tailspin. The Negatives 1. Purchasing Power Can Suffer If an investor is generating a 3% return in their money market account, but inflation is humming along at 4%, the investor is essentially losing purchasing power each year. Over time, money market investing can actually make a person poorer in the sense that the dollars they earn may not keep pace with the rising cost of living. 2. Expenses Can Take a Toll When investors are earning 2% or 3% in a money market account, even small annual fees can eat up a substantial chunk of the profit. This may make it even more difficult for money market investors to keep pace with inflation. Depending on the account or fund, fees can vary in their negative impact on returns. If, for example, an individual maintains $5,000 in a money market account that yields 3% annually with his or her broker, and the individual is charged $30 in fees, the total return can be impacted quite dramatically. â€¢ $5,000 x 3% = $150 total yield â€¢ $150 - $30 in fees = $120 profit The $30 in fees represents 20% of the total yield, a large deduction that considerably reduces the final profit. Note that the above amount also does not factor in any tax liabilities that may be generated if the transaction were to take place outside of a retirement account. 3. FDIC Insurance Net May Not Be There Money funds purchased at a bank are typically insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000 per depositor, according to Care One Credit Counseling. However, money market mutual funds are not usually government insured. This means that although money market mutual funds may still be considered a comparatively safe place to invest money, there is still an element of risk that all investors should be aware of. If an investor were to maintain a $20,000 money market account with a bank and the bank were to go belly up, the investor would likely be made whole again through this insurance coverage. Conversely, if a fund were to do the same thing, the investor may not be made whole again - at least not by the federal government. 4. Returns May Vary While money market funds generally invest in government securities and other vehicles that are considered comparatively safe, they may also take some risks in order to obtain higher yields for their investors. So, in order to try to capture another tenth of a percentage point of return, it may invest in bonds or commercial papers that carry additional risk. The point is that investing in the highest-yielding money market fund may not always be the smartest idea given the additional risk. Remember, the return a fund has posted in a previous year is not necessarily an indication of what it may generate in a future year. It`s also important to note that the alternative to the money market may not be desirable in some market situations either. For example, having dividends or proceeds from a stock sale sent directly to you (the investor) may not allow you to capture the same rate of return. In addition, reinvesting dividends in equities may only exacerbate return problems in a down market. 5. Opportunity Lost Over time, common stocks have returned about 8-10% on average - counting recessionary periods. By investing in a money market mutual fund, which may often yield just 2% or 3%, the investor may be missing out on an opportunity for a better rate of return. This can have a tremendous impact on an individual`s ability to build wealth. The Bottom Line Money market investing can be a very advantageous thing to do. However, before investing any money in a money market mutual fund, investors should first understand both the pros and the cons. Depending on your individual investment and where the market is heading, these accounts could make or break your retirement.