We understand in detail what shares are, what rights they give and due to which their owners make a profit.
What is a promotion?
A share is a security issued by a joint—stock company, in other words, an issuing company. All the investors who bought the shares became co-owners of the company. The action just confirms that its owner has a stake in the company, even if it is very small.
What do shares give to the owner?
You've probably heard the expression "controlling stake" — usually in a movie, the villain insidiously takes over the company, getting 50% and another share. Although this villain is not an absolute owner, he still gets control of the company, because he owns most of it.
But even if you did not buy a controlling stake, but only a tiny piece of the company, you become a shareholder and also get rights, the main of which are:
What are the types of shares?
Shares of companies can be ordinary and preferred. The differences are related to two main rights — to vote and receive dividends.
Sometimes there are preferred shares of special types:
The second in line for the payment of dividends are the owners of standard preferred shares. The amount of dividends on these shares may be equal to a specific amount or a percentage of the nominal value of the share. But most often it is defined as a percentage of the company's net profit for the year divided by the number of preferred shares. The procedure for calculating the dividend is usually prescribed in the charter. The owners of such shares cannot vote in case of payment of dividends. But if no dividends were accrued, then at the next meeting they get the right to vote on all issues.
One joint-stock company may have several types of preferred shares, including shares with special rights. The company's charter should clearly state the order of payment of dividends to their owners. Therefore, before buying preferred shares, carefully study the charter of the joint-stock company.
Holders of ordinary shares can expect dividends only if the company fully fulfills its obligations to all preferred shareholders.
After the dividends are distributed, payments are made to all categories of shareholders of the company simultaneously.
What do stocks look like?
Strictly speaking, nothing. Because of cinematic and literary stereotypes, the word "action" itself is usually associated with a beautiful letterhead. But today the shares are not luxury pieces of paper, they are not printed at all, they are, in official language, undocumented, that is, they exist only in electronic form.
Securities accounting is conducted by special organizations — depositories and registrars. But before working with them, make sure they have a bank license.
How does securities accounting work?
Why buy stocks?
You can buy a block of shares to participate in the management of the company. But most often they are bought to get income.
But there are no guarantees that you will receive the money. If the company worked "in the negative" or the meeting decided not to distribute profits to shareholders, you will not receive dividends. This is a risk that always accompanies investments.
What taxes do stockholders pay?
If you have received income (due to dividends or due to the difference in price when selling shares), you will have to pay tax.
You always need to pay personal income tax on dividends.
Income from the sale of shares is not taxed under three conditions:
Where can I buy shares?
There are two ways — on the exchange or off the exchange. Trading on the stock exchange is more transparent — quotes (prices) of stocks and other securities can be easily tracked. When you buy or sell shares directly, off the exchange, there is a risk that prices will be inflated or undervalued compared to market prices.
In addition, the exchange carefully evaluates the issuing companies. You are unlikely to meet any obvious scammers there. And the rest of the securities are assigned an important attribute as a result of the audit — the listing level.
Today there are three of them. The first level (or the first quotation list) is the most liquid shares of the most reliable companies on the market.
To get into the second quotation list, the requirements are no longer so high. But all companies whose shares claim to be included in the first or second list must regularly report to the exchange on the results of their activities, as well as publish reports and all important information about themselves on the Internet.
The third level is not the quotation part of the list with the lowest requirements. If you are going to buy securities of a third-tier company or a company that is not listed at all on the stock exchange, you will have to evaluate its reliability yourself. And this is not easy even for an experienced investor.
To conduct transactions on the stock exchange, you will need a professional intermediary – a broker or a trustee. They must have a bank license to work on the stock market.
What stocks are available to novice investors?
By law, newcomers to the stock exchange can freely trade shares of state and foreign companies from the first and second quotation lists.
In addition, novice investors can invest in top companies in other countries, even if they have not been listed on the domestic stock exchange. To do this, the bank has compiled a list of the largest national stock indexes. When stocks are included in the calculation of one of these indices, they can be bought without restrictions.
For transactions with stocks that are not included in either the quotation lists or the world stock indexes, you need to pass a special test. Some shares are intended only for a qualified investor – without the status of a qual, you will not be able to conduct transactions with such securities even after testing.
Due to the sanctions, more than 5 million investors faced the blocking of their foreign shares. Therefore, many brokers have introduced restrictions for unqualified investors – in order to reduce the risks of new blockages, non-qualifiers can only sell, but not buy foreign shares.
One broker needs to successfully pass the test once – before making the first transaction with especially risky stocks. But if you want to switch to another intermediary, you will have to pass the check again.
Testing will allow you to check the level of your knowledge about the tool. For example, you will need to answer how quickly you can sell a stock that is not included in the quotation lists. You will also need to calculate the income from the sale of foreign shares, from which you will have to pay personal income tax. To pass the exam successfully, it is necessary to answer all the questions correctly.
What is a promotion?
A share is a security issued by a joint—stock company, in other words, an issuing company. All the investors who bought the shares became co-owners of the company. The action just confirms that its owner has a stake in the company, even if it is very small.
You've probably heard the expression "controlling stake" — usually in a movie, the villain insidiously takes over the company, getting 50% and another share. Although this villain is not an absolute owner, he still gets control of the company, because he owns most of it.
But even if you did not buy a controlling stake, but only a tiny piece of the company, you become a shareholder and also get rights, the main of which are:
- the right to vote at the shareholders' meeting and thus participate in the management of the company (if the share is voting);
- the right to receive dividends — part of the company's profit (if they are paid);
- the right to receive part of the company's property in the event of its liquidation.
What are the types of shares?
Shares of companies can be ordinary and preferred. The differences are related to two main rights — to vote and receive dividends.
- Ordinary. The most common type of shares. They always give the right to vote at the shareholders' meeting, but they do not guarantee dividends.
- Privileged. They have a predetermined amount of dividends — for example, a percentage of the company's profit. Their owners can participate in the voting only if they have not received dividends based on the results of the previous year.
Sometimes there are preferred shares of special types:
- Privileged non-voting. They have a fixed dividend and the right to receive payments in the first place, but they do not allow voting.
- Privileged with special rights. The conditions for the payment of the dividend and the possibility of voting are prescribed in the company's articles of association. For example, the owners of such shares may have the opportunity to vote, receive priority in the payment of dividends and the right to be the first to buy new issues of shares. The charter may also contain any other rights that the company wants to grant to their owners.
The second in line for the payment of dividends are the owners of standard preferred shares. The amount of dividends on these shares may be equal to a specific amount or a percentage of the nominal value of the share. But most often it is defined as a percentage of the company's net profit for the year divided by the number of preferred shares. The procedure for calculating the dividend is usually prescribed in the charter. The owners of such shares cannot vote in case of payment of dividends. But if no dividends were accrued, then at the next meeting they get the right to vote on all issues.
One joint-stock company may have several types of preferred shares, including shares with special rights. The company's charter should clearly state the order of payment of dividends to their owners. Therefore, before buying preferred shares, carefully study the charter of the joint-stock company.
Holders of ordinary shares can expect dividends only if the company fully fulfills its obligations to all preferred shareholders.
After the dividends are distributed, payments are made to all categories of shareholders of the company simultaneously.
What do stocks look like?
Strictly speaking, nothing. Because of cinematic and literary stereotypes, the word "action" itself is usually associated with a beautiful letterhead. But today the shares are not luxury pieces of paper, they are not printed at all, they are, in official language, undocumented, that is, they exist only in electronic form.
Securities accounting is conducted by special organizations — depositories and registrars. But before working with them, make sure they have a bank license.
How does securities accounting work?
- If your securities are taken into account by the depository, then the ownership of them is confirmed by the statement of the depot account. This is your personal account, where it is indicated which securities you own.
- If the registrar keeps records, then in order to confirm ownership, you need to request a personal account statement from the registrar. This statement shows how many shares you have in a particular company.
- If your assets are managed by a trustee, the shares are stored in his depot account or personal account with the registrar. You cannot request an extract directly from the depository or registrar, but you have the right to request a transaction report from the trustee at any time.
Why buy stocks?
You can buy a block of shares to participate in the management of the company. But most often they are bought to get income.
- At the expense of dividends. If the company made a profit at the end of the year and the general meeting decided to distribute it among shareholders, then you will receive dividends for each of your shares.
But there are no guarantees that you will receive the money. If the company worked "in the negative" or the meeting decided not to distribute profits to shareholders, you will not receive dividends. This is a risk that always accompanies investments.
- Due to the growth of the share price. You buy stocks and expect their price to rise in the future. When you sell them, you will receive income — the difference between the price for which you bought the stock and the price for which you sold it. Do not forget that you still have to pay for services to the depository or registrar, the broker's commission and the profit tax on the sale. Moreover, you may not only not receive income, but, on the contrary, even lose money. For example, if the shares fall in price. As you know, there are no guarantees in the securities market and there can not be, and there is always a risk.
What taxes do stockholders pay?
If you have received income (due to dividends or due to the difference in price when selling shares), you will have to pay tax.
You always need to pay personal income tax on dividends.
Income from the sale of shares is not taxed under three conditions:
- you bought shares on the stock exchange
- they kept them for at least three years
- and earned due to the difference in price of less than a certain amount in a year.
Where can I buy shares?
There are two ways — on the exchange or off the exchange. Trading on the stock exchange is more transparent — quotes (prices) of stocks and other securities can be easily tracked. When you buy or sell shares directly, off the exchange, there is a risk that prices will be inflated or undervalued compared to market prices.
In addition, the exchange carefully evaluates the issuing companies. You are unlikely to meet any obvious scammers there. And the rest of the securities are assigned an important attribute as a result of the audit — the listing level.
Today there are three of them. The first level (or the first quotation list) is the most liquid shares of the most reliable companies on the market.
To get into the second quotation list, the requirements are no longer so high. But all companies whose shares claim to be included in the first or second list must regularly report to the exchange on the results of their activities, as well as publish reports and all important information about themselves on the Internet.
The third level is not the quotation part of the list with the lowest requirements. If you are going to buy securities of a third-tier company or a company that is not listed at all on the stock exchange, you will have to evaluate its reliability yourself. And this is not easy even for an experienced investor.
To conduct transactions on the stock exchange, you will need a professional intermediary – a broker or a trustee. They must have a bank license to work on the stock market.
What stocks are available to novice investors?
By law, newcomers to the stock exchange can freely trade shares of state and foreign companies from the first and second quotation lists.
In addition, novice investors can invest in top companies in other countries, even if they have not been listed on the domestic stock exchange. To do this, the bank has compiled a list of the largest national stock indexes. When stocks are included in the calculation of one of these indices, they can be bought without restrictions.
For transactions with stocks that are not included in either the quotation lists or the world stock indexes, you need to pass a special test. Some shares are intended only for a qualified investor – without the status of a qual, you will not be able to conduct transactions with such securities even after testing.
Due to the sanctions, more than 5 million investors faced the blocking of their foreign shares. Therefore, many brokers have introduced restrictions for unqualified investors – in order to reduce the risks of new blockages, non-qualifiers can only sell, but not buy foreign shares.
One broker needs to successfully pass the test once – before making the first transaction with especially risky stocks. But if you want to switch to another intermediary, you will have to pass the check again.
Testing will allow you to check the level of your knowledge about the tool. For example, you will need to answer how quickly you can sell a stock that is not included in the quotation lists. You will also need to calculate the income from the sale of foreign shares, from which you will have to pay personal income tax. To pass the exam successfully, it is necessary to answer all the questions correctly.
To prepare for the test, you can take training in advance.
What risks can you face when buying shares?
Investing is always a risk. And it is proportional to the likely yield of securities: the more you can earn, the more risk you take. There are three main risks that await investors.
Finally, we summarize the recommendations for novice investors:
What risks can you face when buying shares?
Investing is always a risk. And it is proportional to the likely yield of securities: the more you can earn, the more risk you take. There are three main risks that await investors.
- Market risk means that securities may rise or may fall in price. It is determined only by the market law of supply and demand. For example, if a company has discovered a new oil, gas, gold or palladium deposit, its shares are likely to jump. And if, say, a financial company's license is suspended, its securities will fall sharply.
- Liquidity risk means that the securities you purchase may be difficult to sell later. Or no one will want to buy them at all, or they will agree, but only at a big discount — at a very low price. That is, "blue chips" — the papers of the largest and most reliable companies — you can, if you wish, sell in a matter of minutes. And for the shares of an unknown company, it is unlikely that there will be a queue of those who want to.
- Credit risk is the risk that the issuing company will go bankrupt. Then your securities will sharply depreciate. But you will be able to count on your share of the company's property at the end of the bankruptcy procedure.
Finally, we summarize the recommendations for novice investors:
- Do not invest your last money in the securities market. First, prepare yourself a reliable rear: put from 3 to 6 of your monthly income on deposit in a reliable bank.
- Remember the direct relationship between risk and profitability. If some stocks rise sharply in price (or it seems to you that they should soar), it means that they may also fall sharply (or simply not rise).
- Don't put all your eggs in one basket. If you decide to invest in stocks, choose several companies, preferably from different industries.
- Keep your finger on the pulse of events. If you have become a co-owner of a company, keep track of what is happening to it and the price of its securities.
- If you find it too difficult or troublesome to monitor the situation on the stock market yourself, you can use other options. For example, to conclude a contract with a trustee or buy a mutual fund that invests in securities.