Moremi Marwa, Chief Executive Officer, Dar es Salaam Stock Exchange
Let’s start the New Year, 2015 by going back to the basics: What does owning shares mean? What is a share? Who can issue shares, Who can invest in shares, etc.
Owning shares.
Wouldn’t you love to be a business owner without ever having to show up at work? Imagine if you could just be sitting back, watch your company grow, and collect the dividend cheques as the money rolls in! And in case of liquidity challenges and you real need money, you can just look onto the TV or read newspaper, get the price of your investment, call a broker, place a sale order and there you are – have the money you really needed. This situation might sound like a dream, but it’s closer to reality than you might think.
This is what owning shares is all about.
When you start on your road to financial freedom, you need to have a solid understanding of shares and how they trade on the share market – commonly known as the stock exchange – Dar es Salaam Stock Exchange is one of those markets.
Over the last few decades, the average person’s interest in the share market has grown exponentially. Shares are now widely considered as the vehicle for growing people’s wealth. We might have come across a story of one real rich man called Warren Buffet of Omaha, Nebraska, in the United States of America, who has made a significant amount of wealth through investing in shares via a company called Berkshire Hathaway Inc.
Despite their popularity, however, most people don’t fully understand shares. You have probably heard comments from relatives and friends:
“Moremi’s uncle made a killing in TBL and TCC shares, and now he’s got another hot tip...” or “Watch out with shares-you can lose everything in a matter of days!” So much of this misinformation is based on a get-rich-quick speculative mentality. This has been some misinformed people within our societies; sometimes people think that shares are the magic answer to instant wealth with no risk. Recent financial crashes have proved otherwise, people lost their savings, their pensions, and their wealth through investing in shares. Shares can (and do) create massive amounts of wealth, but they aren’t without risks. The key to protecting yourself in the share market is to understand where you are putting your money. It is for this reason that we have initiated and embarked on this leadership programme: to provide the foundation you need in order to make investment decisions yourself. Yes, you might need to seek investment and financial advice from more sophisticated and trained individuals, but you will have the basics.
So what is a share?
1. A good place to start on your basic investment knowledge journey is to understand what a share is, different types of shares and the share market.So let’s begin at the beginning with a basic understanding of what shares are.
Definition of a share.
Plain and simple, shares represent ownership of a company. A share represents a claim on the company’s assets and earnings. As you acquire more shares, your ownership stake in the company becomes greater. Whether you say shares, stocks, equity, it all means the same thing.
By buying a share, money, which could have been idle or otherwise, held in low interest earning savings in banks and other financial institutions and instruments moves to a more productive economic activity.
Being an owner.
Holding a company’s shares means that you are one of the many owners (shareholders) of a company, and, as such, you have a claim to everything the company owns. Yes, this means that technically you own a relative part of every piece of furniture, every machinery and equipment, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company’s earnings as well as any voting rights attached to the shares.
A share to the company is represented by a share certificate, (or a CDS Receipt for shares listed on the Dar es Salaam Stock Exchange), a piece of ownership of a company. When you buy a share, you become an investor (or a shareholder) and thereby an owner of a piece of the company’s assets, debts, profits or losses.
One thing to note though -- being a shareholder of a public company (a company listed in the stock market) does not mean you have a say in the day-to-day running of the business, as opposite to a sole proprietorship, or a partnership or even a private company. Instead, one vote per share to elect the board of directors, to approve appointment of auditors or to approve audited accounts at annual meetings is the extent to which you have a say in the company.
For instance, being an NMB Bank shareholder doesn’t mean you can call up NMB’s Chief Executive Officer and tell him how you think the bank should be run. In the same line of thinking, being a shareholder of TBL doesn’t mean you can walk into the factory and grab a free case of beer!
The governance and management of the company is supposed to increase the value of the firm for shareholders. If this doesn’t happen, the shareholders can vote to have the board, and in some cases, the management removed. You don’t have to work to make money, management works for you.
This last point is worth repeating: the importance of share ownership is your claim on assets and earnings. Without this, the shares wouldn’t be worth the paper it’s printed on.
Another extremely important feature of shares is its limited liability, which means that, as an owner of a share, you are not personally liable if the company is not able to pay its debts.
Other businesses such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders) personally and sell off their house, car, furniture, etc.
Owning shares means that, no matter what, the maximum value you can lose is the value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets.
Moremi Marwa is the Chief Executive Officer of Dar es Salaam Stock Exchange
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