Securities | How do you understand a simple explanation of what a stock is?
We hear and read a lot about securities in various media. We can also notice the interest of most of these media outlets to broadcast a daily bulletin or paragraph about the prices of securities, their trading volumes, and the names of the companies that issue them. Although many people may not pay attention to this information, there is a good percentage of people who pay attention to it and follow it daily. As it helps them in making their investment decisions, developing their capital, and achieving profits. This article comes in order to clarify what these papers are, their types, characteristics, importance, mechanisms of action, and most importantly, their role in economic development at the micro and macro levels.
What a stock is
Financial securities refer to all the securities and instruments issued by public and civil governmental bodies, and private companies. It grants its owner the right to its issuers. Meaning that the holder of these securities becomes a partner in the organization that issued them and deserves profits, and he may have the right to vote on decisions and membership of public bodies in that organization, depending on the type of securities he owns.
Securities can also express all the means that help organizations finance their activities and businesses in the long term. And that is through the issuance of several types of these securities, such as shares, of both types: regular and preferred, in addition to debt bonds. These types represent instruments that give their holder the right to a specific return or profit or part of the organization’s assets.
Types of securities
The types of securities differ and vary according to their shape, purpose of issuance, and issuer. If we want to go into a deep discussion of its details, we will need several articles. That is why we will discuss – in this article – the most prominent types of securities in a brief and simple manner.
First: Stocks, which are proof of someone’s ownership of a part or share of the issuing company. On this basis, it can be said that shares are evidence or proof that their holder has a part or share in the company that issued that share. Shares are divided into two main types:
Common Stocks: These are non-payable securities that carry a face value (i.e. the value written on the stock instrument at the time of its issuance). The stock does not include an explicit promise to pay a fixed dividend. As for the purpose of issuing them, it is to obtain funds to be invested in financing companies’ business and activities. One of the most important characteristics of ordinary shares is that they give their holders a right to the ultimate ownership of the company. And the consequent bearing of risks in the company’s business, as the ordinary shareholder bears the liability consequences determined by the percentage of his contribution to the company. In the event that the company is liquidated, the ordinary shareholders are not entitled to claim their rights to the value resulting from the liquidation, except after the claims of all the lenders and the preferred shareholders are paid. Common shareholders enjoy certain rights, including: the right to vote, the right to sell the shares they own, and the right to amend the articles of association of the company.
We can refer here to the importance of ordinary shares for companies, so we can say that their importance stems from the fact that the issuing company is not obligated to make periodic payments to the shareholders. Because the distribution of profits is decided annually by the general assembly and at the suggestion of the company’s management. Likewise, there is no specific due date for ordinary shares; Because there is no need to pay it, unlike the debt that has a specific maturity and must be paid at the time it is due. The importance of ordinary shares is also enhanced by the fact that the right of ownership provides protection to creditors from fluctuations in the company’s financial conditions; Which means that issuing them leads to an increase in the credit position in front of creditors, thus reducing the cost of capital and enhancing the future ability to borrow from other parties. Finally, the importance of ordinary shares stems from the fact that their prices keep pace with inflation. Which means protecting the shareholders from the decrease in the purchasing power of the money invested in the company.
Preferred Stocks: Preferred stocks are a mixture of borrowing and equity. Thus, bonds are similar in that they have a fixed rate of profits and their owner has the right of priority in the distribution of profits and the value of liquidation – in the event of the company’s bankruptcy or liquidation – before the common stock and after the debts. On the other hand, it is similar to ordinary shares in that it is not payable. However, it differs from ordinary shares in terms of voting rights. The holder of the preference share does not have the right to vote on the company’s decisions. This means that the holders of preferred shares do not have representatives on the company’s board of directors. The preferred shares are of different types: there are preferred shares with accumulated profits, which means that if the company fails to pay the dividends in a year, the profits distributed for that year will move to the next year. But if the preference shares are not cumulative, then the determined dividends that are not paid in a given year cannot be transferred to subsequent years.
Preferred shares achieve a number of advantages for the issuing company, the most important of which are: they are considered a permanent source of financing in the company that does not have to be repaid, and failure to pay the determined dividends does not cause the company to bankrupt, in addition to that, the preferred shares are considered part of the ownership rights in the company. It supports the equity-to-debt ratio thus broadening the company’s virtual capacity. It can be added here that the cost of preference shares may be much higher than the cost of debt if we take into account that the profits distributed on preferred shares cannot be presented as the cost of interest on debt for tax purposes.
Second: Bonds, which are a type of securities issued by governments or companies and the issuer undertakes to pay financial returns according to a specified rate or percentage, and at specific dates during the validity period of the bonds, and it also undertakes to pay the nominal value of the bonds when the maturity date arrives. For example, if a person buys bonds from a company with an amount of one thousand dollars, and an interest rate of 8% and the maturity date is after five years, then he is entitled to an amount of $ 80 as a fixed annual return. And at the end of the five years, the company will buy the bonds for the value that it sold ($ 1000).
Bonds are of great interest to people who want to invest in a balanced portfolio of investments. Because bonds have relatively little volatility, compared to stocks, bonds can add stability and diversification to an investment portfolio. It may also provide a steady stream of fixed income returns and opportunities for long-term capital development.
The bonds provide a host of benefits to their owners, including: Benefit from the organization’s income streams; It is suitable for people who tend to have stable income on their capital during the investment period. Also, investing in bonds reduces risk. Diversification is very important, because different asset classes can respond differently to different market conditions, while investing in bonds can reduce the overall risk of the investment portfolio, as it is less volatile compared to some asset classes, such as stocks.
Also read: How to invest a small amount of money?
In addition to the above, bonds provide opportunities for long-term gains. It provides opportunities for growth in capital by selling it if its market value increases.
There are many types of bonds that we will not go into in detail here in order to avoid prolongation, and we may return to talking about them in a separate article, God willing.
The importance of investing, stocks, securities, investing, financial awareness, money and business
HOW I MOTIVATE MYSELF TO WORK HARDER
I respect that style of life and that mindset, people who work hard totally deserve it. But when I get to have more money than I need, I will try to invest it in foundations where needed people are helped or maybe an animal shelter, Idk, I think is more satisfying sharing what you’ve got. 🙂
I don’t think that it’s a good idea to spend more than you can afford in order to seek motivation to do better. I wonder how many people have grown their businesses following this theory; because there seems to be none.
People work hard, encounter failures, learn, get back up, work even harder in order to succeed. They don’t just go on a crazy shopping spree so that they can earn more and do even more crazier things the next day.
One should always spend according to one’s abilities and should focus on investing rather than spending.
In some way I’m agree, i love everything nice in life. Simple example, once you use good gadgets you won’t down grade. Only up grade. Same with every thing else in life, that can be a motivation for sure.
However, you can’t always stay in a nice hotel. For example I’m running spa products company and many time in my business trip i never mind to stay in 3 star hotel if they are closer to the industrial area so i can be near to the factory we are visiting or our next client.
But on the other occasion such as attending exhibitions which normally located on more prestigious area i would be more than happy taking 5 star hotel as long as they are super close to the exhibition. Depan on the goals really.
But she also mention that we build business to make life better. That also huge motivation.
We make sure we do our best in our end so we can only grow and hire more people. You never know how much you can change people’s live indirectly.