Investing in Shares: The Advantages and Risks

Table of Contents

What Is a Share?

A share is the smallest unit that a company can be divided into. When a business wants to raise capital to expand, it offers a portion of its ownership, in the form of shares, to investors. The founders decide what percentage of the shares to keep among themselves, and how many to offer investors.

Depending on the needs and size of the business, shares can be sold privately or publicly. To offer shares publicly, the company needs to be listed on a stock exchange like the Johannesburg Securities Exchange (JSE).

What Are Dividends?

Dividends are regular payments that a company makes to its shareholders. They are a portion of the profits and are decided on by the board of directors. They are usually in the form of cash, but can also be paid as additional shares. This often happens when the company is not able to pay out cash.

Whether in cash or bonus shares, dividends are paid per share. For example, if the company pays out R30 per share, and you own 50 shares, you will receive a total income of R1 500. Dividends are generally paid out in periods of 3, 6 or 12 months.

How Can You Buy Shares on the Stock Market / Securities Exchange?

To invest in the stock market, you need to open an account with a stockbroker. It is through the broker that you will be able to buy and sell shares. This comes with brokerage fees such as a commission for every transaction made.

The Advantages of Investing in Shares

Public shares can be traded freely on the JSE.
Shareholders have limited liability for company debts.
Ordinary shareholders have voting rights at Annual General Meetings (AGMs).
Shares can generate higher returns than bank deposits or property.
Shareholders get paid a portion of the company’s profits in the form of dividends.
Holding a larger number of shares can result in a higher dividend pay-out.
The value of the shares often increases as the company grows or expands.
Investing in shares offers protection against inflation.
Investing in shares can provide significant returns at retirement age.
In South Africa, dividends are taxed at a fixed rate of 20%, which can be a tax advantage for higher income earners.

The Risks of Investing in Shares

Shares have a low to medium risk over a long investment period.
Ordinary shares have the highest risk because the investor can lose all or part of their investment if the company is dissolved, declared bankrupt or gets liquidated.
Preference shareholders have a lower risk because they have a preferential claim on the company assets in the event of bankruptcy or liquidation and receive compensation before ordinary shareholders.
Share prices are linked to factors beyond the control of investors, such as national and international economic conditions.
The value of the investment is uncertain in the short term because share prices are unpredictable. They can rise and fall in seconds.
Dividends are determined by the management or directors of the business.
Shareholders may receive little to no dividends if the company performs poorly.
Companies are not legally obliged to pay dividends to shareholders.

Test Yourself

Now it is time for you to test your knowledge. Download the quiz cards below and practice answering these NCS exam questions. Share them with your friends and test each other online. You will find more images like this, and other Grade 12 Business Studies notes, on my Facebook page:Nonjabulo SA.

1. Help your client make the best investment decision by explaining the benefits of investing in shares.

2. Analyse the risk factors of shares as a form of investment.

Investing in Shares: The Advantages and Risks | CAPS Aligned (2024)