How to get shares and what you get from them
In PART 1 we saw what shares are, and maybe you will be asking yourself how you can acquire them. Shares can be obtained in majorly, the following three methods:
· Over the Counter (OTC)
This is buying and selling shares without the regulation of the government. These shares are usually bought directly from the company issuing those shares. Normally the company is not listed in the stock market and these shares come at a cheaper price. Most of the companies selling their shares this way are private companies.
· Initial Public Offer (IPO)
This is the first sale of shares by a company to the public (to all persons that want and can afford to buy). All the money from this sale goes to the company as the capital. When a company sells its shares in an IPO, it “goes public”. An example is the sale of Yetu Microfinance shares that occurred last month and was advertised in different media stations.
· Secondary market
This is a market in which previously issued financial instruments (such as shares) are bought and sold. Previously issued means that they were already traded in OCT or in an IPO. This is when shares are in people’s hands (individuals and corporations) and they are traded in the stock market. In Tanzania the stock market is the Dar-es-salaam Stock Exchange (DSE). The money gained in this market does not go to the companies; rather it remains in the hands of the public. This is where people get profit/loss from selling their shares.
Profit from owning (or trading) in shares can come in the following two ways:
· Capital gain – this is the gain derived when the value of a held share appreciates (increases in value). For example, if in 2010 you bought 1,000 shares in company XY, each costing Tshs. 400/ and now (2014) each share costs Tshs. 1,000/, then your capital gain is Tshs. 600 per share (thus Tshs 600,000 in total) because Tshs. 1,000 minus Tshs. 400 is the Tshs 600 you get as profit. This times the number of shares (1,000 shares) is the capital gain you get that is Tshs. 600,000. Capital gain is usually realized at the sale of the shares.
The best thing about capital gain is that it is not taxed. This is because the government is set on encouraging investors to invest more.
Young people who invest in shares should focus more on the capital gain.
· Dividends – When any business makes profit, it is normally given to the owners. Shareholders are owners of a company so the profit that the business has made is distributed to the shareholders depending on the number of shares held per shareholder. This is normally realized whenever the business makes profit and decides to distribute dividends, which is by and large yearly for most companies. Older people who invest in shares should focus more on dividends, as a more/less stable source of income while the younger generation can focus on the capital gain.
