Share Market School

Benefits of owning shares

• Share
• Tweet

• Share
• Tweet

What are the benefits if you own shares? There are many other benefits as we have explained in the following paragraphs:

EARN DIVIDENDS.

Dividends are nothing but a part of company’s profits distributed to its share holders. The company’s management may declare dividends either in between a financial year (called interim dividends) or at the end of the financial year (called final dividends).However, it is not mandatory for the companies to pay dividends. It can use the profits for alternative uses like expansion. The decision to pay or not to pay dividends is taken at the annual meeting by the majority voting of the shareholders. Blue-chip companies (large companies) generally are consistent dividend payers.

CAPITAL APPRECIATION.

As the company expands and grows, it acquires more assets and makes more profit. As a result, the value of its business increases. This, in turn, drives up the value of the stock. So when you sell, you will receive a premium over what you paid. This is known as capital gain and this is the main reason why people invest in stocks. They aim capital appreciation.

RECEIVE BONUS SHARES

For the time being, let us understand that bonus shares are – Free shares are given to you .Later on we will discuss about bonus shares in detail.

RIGHTS ISSUE

A company may require more funds to expand it’s business and for that, it may need more funds. I such cases, the company can issue further shares to the public. However, before approaching the public, the existing shareholders will be given a chance to subscribe to more shares if they want. That’s called a rights issue. This is done in order to ensure that the existing shareholders maintain the same degree of control in the company. Thus you can maintain the participation in the company profits.

SHARES CAN BE PLEDGED

Shares are considered as assets and hence, banks accept shares as security for raising loans. Should there be an an emergency, shares can quickly pledged to raise funds. Apart from that, Brokerage firms allow you to borrow money from their account based on the current share holding you have in your demat account maintained with them. If you want to utilize a sudden surprise opportunity in markets, but if you don’t have the cash right now, you can adopt this route.

HIGH LIQUIDITY

Shares are highly liquid. It can be converted into cash in no time. With online trading, all it takes is the click of button to sell you holdings. You can receive your cash in two days.

CAPITAL APPRECIATION OR DIVIDENDS?

The above mentioned income sources may not be present in every company you buy. For example- if you’re buying company that has a huge potential to grow, it may not pay it’s surplus as dividends. Instead, it will be used for further growth. In such cases, huge capital appreciation may happen. So depending upon your investment strategy, you’ll have to choose what you want. It’s always wise to go for capital appreciation rather than dividends.

You may like these posts:

1. Basic charcteristics of shares
2. Lessons in computing returns – IV Returns from shares.
3. Should you invest or trade in stocks?