What is a Stock Exchange?
At its most basic, the stock exchange is a market which brings together people who want to buy shares in a company, and those who want to sell their shares. The laws of supply and demand determine the prices buyers and sellers settle on. The companies whose shares can be bought and sold on the stock exchange are referred to as listed companies.
What are shares?
A share (or equity) is simply a part-ownership of a company. If, for example, a company has issued a million shares, and you buy 10,000 shares in it, then you own 1% of the company. As a part-owner of a company, you are investing in the management of the company. Stockholders make money through dividend payments and the sale of stock that has risen in value. Dividends are income distributions to shareholders, usually paid quarterly. Not all stocks pay dividends.
There is no guarantee that stock prices will go up and investors should invest in companies they feel confident are well run.
Shares are traded on recognised stock exchanges such as the New York Stock Exchange, London Stock Exchange and the Malta Stock Exchange.
What are the reasons for investing in shares?
Capital Growth: Over the long term, shares can produce significant capital gains through increases in share prices.
Some companies can also issue bonus shares to their shareholders by way of a “bonus issue” as another way of passing on company profits or increases in their net worth. A bonus issue occurs when money from a company’s reserves is converted into issued capital, which is then distributed to shareholders in place of a cash dividend. A bonus issue does not change the value of your investment.
Many listed companies also issue what are called “rights issues” where they provide opportunities to their existing shareholders to buy more shares in the company at a discounted rate. Companies do this as a way of raising more capital for expansion, and it provides you with an opportunity to increase your holding in the company at a discounted price if you are confident of its potential.
Dividends: Companies may pay a portion of their profits to their shareholders in the form of dividends. The amount of dividends to be paid to existing shareholders is usually determined and approved at the company’s Annual General Meeting. The amount of profit which is not distributed is ploughed back into the company in the form of reserves. Such accumulation of reserves is then used by the company for future projects.
Buying and Selling: Compared to other investments (such as property), shares can be bought or sold quickly through a stockbroker. You can, if you so wish, sell part of your holdings in any shares.
Diversifying: As part of your investment strategy, you may have part of your money invested in shares. You may buy shares directly on the stock exchange or via units in collective investment schemes (Funds) which invest in shares.
What is the best way to keep track of my shares?
Online: One of the best ways to keep track of shares is online. All shares can be tracked online including via our award winning online platform CC WebTrader™
Portfolio Valuations: You may request a portfolio valuation from your Investment Advisor at any time. You should always keep a copy of your most recent statement and valuation.
Are shares a risky investment?
As with all other investments, prices of shares can go up as well as down. Sometimes, share prices can change substantially as a result of reaction to some news which may affect the listed company. Whenever there is news about a listed company which shows, for example, improvement in its profits, investors tend to react positively by purchasing more shares into the company. As the demand for the shares increases, so will the price because people would be less willing to sell their holdings in the shares. This is referred to as the law of supply and demand – when demand increases, prices increases. On the other hand, price will start to fall sharply when investors, react negatively to news about the company, dispose of their holdings as quickly as possible to minimise any dramatic downfall in the value of their shares.
There are instances where share prices can fall dramatically. Don’t get into a panic – think carefully before selling your shares quickly at a loss. In fact, don’t buy or sell on the basis of a change in price only. Your decision to buy or sell should also be based on your analysis of the annual report, changes in management, news about the company etc.
A company is not obliged to pay periodic dividends, even if it has made profits. Hence, you may find that although in one year a company has paid out dividends to its shareholders, the following year that same company may choose, for a number of reasons, not to share part of its profits with its shareholders. Therefore, shares are not suitable if you want a periodic (such as annual) payment of interest. Shares are perhaps more suitable for those seeking capital growth and are prepared to take some risk.
Are all your eggs in one basket? Ask yourself: is this your only investment or your biggest investment (except for your home)? If all your money is going into purchasing shares only or in units of collective investment schemes which invest in shares, you will be taking a bigger risk when compared to someone who has a variety of other safer investments such as Bonds or Bond Funds.
What is the best way to obtain information about a company?
You should obtain professional advice from your Independent Investment Advisor and your own research when deciding which companies to invest in. The following points provide you with some suggestions regarding sources of information available to the investing public.
Read and listen to the media: This includes newspapers, radio, television and Internet sites. If the company is listed on a Stock Exchange you can look at its share price to obtain an indication of the current value of the share for the company.
Read the company’s annual report: If a company is listed on a stock exchange look at its most recent annual reports to see what it has been doing for the past few years and whether it has delivered on its promises. Usually the company will give you these for free or you can get them from your Investment Advisor. The reports will include financial statements, details of the company’s operations over the past year, what the company does, and details of directors and major shareholders of the company. The company’s balance sheet shows what the company owns and what it owes, and its profit and loss statement shows what the company has earned during the year and how these earnings have been distributed.
Look at company announcements: From time to time, listed companies make announcements about major issues related to their operations. For example, an announcement by a listed company could be made when half and full-year accounts are made public. You can also speak to your Investment Advisor who monitors such announcements.
Read reports by stockbrokers: Many stockbrokers carry out analysis of various listed companies. Some stockbrokers also send such newsletters to their clients.
Visit the company’s website: All listed companies nowadays have their own website which have large amounts of information about the company’s activities and its price.
Ask an independent investment advisor: Independent Investment advisors have access to a wealth of information, they can also provide you with their unbiased opinion.
What is an "Initial Public Offering"?
An Initial Public Offering (sometimes referred to as IPO or “flotation”) occurs when a company offers its shares to the public for the first time to raise capital. For this purpose, the company issues a *prospectus, which is a document that will help you decide whether the company is a suitable investment for you. A prospectus is required by law to contain all the information you and your intermediary would need so as to make an informed investment decision about the company. It must clearly disclose any risks associated with the investment.
You should not only be interested in what the prospectus says but also think about the matters that it is silent on. Understand the assumptions in the forecasts: many companies make profit forecasts in their prospectuses which are not met. So you need to read the prospectus critically and decide whether the assumptions made in the prospectus are reasonable. The company should disclose what assumptions were made in preparing those forecasts.
What are bonds?
A bond is a debt security. When you purchase a bond, you are lending money to a government or a private corporation known as the issuer. In return for the loan, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond, sometimes referred to as the principal, when it “matures”, or comes due.
There are various types of bonds you can choose from: local and foreign government securities, corporate bonds, developing country bonds and Eurobonds.
If a business wants to expand, one of its options is to borrow money from individual investors. The company issues bonds at various interest rates and sells them to the public. Investors purchase them with the understanding that the company will pay back their original principal plus any interest that is due by maturity. Bondholders will normally receive interest payment every six months or yearly. The rate of interest paid on the bond is a factor of the credit worthiness of the underlying asset (the company or government).
Why invest in bonds?
Most Investment Advisors recommend that investors maintain a diversified investment portfolio consisting of a range of securities in varying percentages, depending upon individual circumstances and objectives. Because bonds typically have a predictable stream of payments and repayment of principal, many people invest in them to preserve and to increase their capital or to receive dependable interest income.
What aspects do I have to look for if I choose to invest in bonds?
There are a number of key variables to look for when investing in bonds: the bond’s maturity, redemption features, credit quality, interest rate, price, yield to maturity and tax status. Together, these factors help determine the value of your bond investment and the degree to which it matches your investment objectives.
Maturity: A bond’s maturity refers to the specific future date on which the investor’s principal will be repaid. Bond maturities generally range from one day up to 30 years. Maturity ranges are often categorised as follows:
- Short-term bonds: maturities of up to 4 years
- Medium-term bonds: maturities of 5 to 12 years
- Long-term bonds: maturities of 12 or more years
Redemption Features: While the maturity period is a good guide as to how long the bond will be outstanding, certain bonds have structures that can substantially change the expected life of the investment. For example, some bonds have provisions that allow or require the issuer to repay the investors’ *principal at a specified date before maturity. Bonds are commonly “called” when prevailing interest rates have dropped significantly since the time the bonds were issued.
Before you buy a bond, always ask if there is a call provision and, if there is, be sure to obtain the yield to call in addition to the yield to maturity. Bonds with a redemption provision usually have a higher return to compensate for the risk that the bonds might be called before maturity.
Your choice of maturity will depend on when you want or need the principal repaid and the kind of investment return you are seeking within your risk profile. Some investors might choose short-term bonds for their comparative stability and safety, although their investment returns will typically be lower than would be the case with long-term securities. Alternatively, investors seeking greater overall returns might be more interested in long-term securities despite the fact that their value is more vulnerable to interest rate fluctuations and other market risks. Longer term bonds will fluctuate more than short term bonds – even though they might have higher yields to maturity.
Credit Quality: Bond choices range from the highest credit quality, which are backed by the full faith and credit of the issuing entity (such as the government), to bonds that are below investment grade and considered speculative.
When a bond is issued, the issuer is responsible for providing details as to its financial soundness and creditworthiness. This information is contained in the prospectus. If your intermediary is not able to provide you with a copy of this document, you should request a summary of the main features attached to the bond which you intend to purchase. Such features would normally include: information about the issuer, name of the bond (including date of maturity), current price, accrued interest (if any), frequency of interest payments, redemption information and ratings. Make sure that all information given to you verbally is put down in writing for future reference.
How can I know whether the company or government entity whose bond I'm buying will be able to make it's regularly scheduled interest payments?
You may have heard your Investment Advisor mention the term “Triple A” or simply an “A”. These are called “ratings”. Large bond issues are usually given a rating by a rating agency. These agencies – such as Moody’s or Standard and Poor’s – give these ratings when bonds are issued and monitor developments during the bond’s lifetime. Such agencies maintain research staff that monitor the ability and willingness of the various companies, governments and other issuers to make their interest and principal payments when due. Your Investment Advisor can supply you with current research on the issuer and on the characteristics of the specific bond you are considering.
Each of the agencies assigns its ratings based on an in-depth analysis of the issuer’s financial condition and management, economic and debt characteristics, and the specific revenue sources securing the bond. The highest ratings are AAA (Standard & Poor’s) and Aaa (Moody’s). Bonds rated in the BBB or Baa category or higher are considered investment-grade; securities with ratings in the BB or Ba category and below are considered below investment-grade.
It is extremely important to understand that, for any single bond, the high interest rate that generally accompanies a lower rating is a signal or warning of higher risk. Another important factor is that Credit ratings are not the only measure that once should consider when assessing a company; they are simply an indicator.
What is a "Fund" or "Collective Investment Scheme"?
A fund can be defined as an investment cooperative managed by an investment company. As in other cooperatives, mutual fund investors pool their assets together and employ an investment company with investment professionals and administrators who conduct the day-to-day business of managing the fund. Funds help investors to reduce investment costs. The major benefit of funds is that the investment is spread over a wide range of assets, which in turn can reduce the risk. When investing in a fund, the investment is used to buy a number of units – which represent a share of the assets of that particular fund. For example, if one invests €1,000 in a fund where the price of units is €1, then the investor will own 1,000 units.
Funds are financial products where money from a number of different investors are pooled and then invested by a fund manager according to specific criteria. The scheme or fund is divided into segments called ‘units’, which are to some degree similar to shares. Investors take a stake in the fund by buying these units – they will therefore become unitholders. The price of a unit is based on the value of the investments the fund has invested in. Funds may have different fee structures – make sure you understand the fees involved beforehand as these charges may have a major impact on the performance of your investment.
How do funds vary from one to another?
Funds can invest in shares, bonds, bank deposits and other financial products. Usually, fund managers select the investments they think will do best and switch from one to another as market conditions change. However, fund managers are obliged to follow prescribed investment criteria which are set out in the prospectus which is approved by the regulator.
There is a wide variety of funds:
- Money market – they invest in deposits and short-term securities. These are low risk but cannot be expected to give high returns over the long-run.
- Bond Funds – invest in corporate bonds, government bonds and/or similar securities. They are medium to low risk and usually aimed at providing income rather than growth. Because there are many different types of bonds, bond funds can vary dramatically in their risks and rewards.
- Equity (or share) Funds – generally involve more risk than money market or bond funds, but can also offer the highest returns. A fund’s value (*net asset value) can rise and fall quickly over the short term, but historically shares have performed better over the long term than other type of investments. Not all equity or share funds are the same. For example, growth funds focus on shares that may not pay a regular dividend but have the potential for large capital gains.
- Balanced Funds- invest in a combination of shares and bonds ensuring diversification. They are suitable if you want a medium-risk investment. They can be aimed at providing income, growth or both.
- Tracker – unlike the other funds listed here, there is no fund manager actively choosing and switching securities. Instead, the investments are chosen to move in line with a selected *stock index – such as the FTSE 100, an index of the share prices of the 100 largest companies (by market capitalisation) in the UK which is updated throughout the trading day. As there is no active management, charges are usually lower.
- Specialist – invest in particular sectors, such as Japan, or particular types of shares, such as small companies. Suitable only if you are comfortable with relatively higher risk.
- Sector – invests in a specific sector such as Retail or Telecommunication Services.
How do I earn money from an investment in a Fund?
You can earn money from your investment in a collective investment scheme in three Ways:
First, a fund may receive income in the form of dividends and interest on the securities it owns. A fund will pay its unitholders nearly all the income it has earned in the form of dividends. Usually, these funds are called “Distributor Funds”.
Second, the price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds may choose to distribute these capital gains (minus capital losses) to investors.
Third, if a fund does not sell but holds on to securities that have increased in price, the fund’s value (net asset value) increases. The higher net asset value reflects the higher value of your investment. If you sell your units, you make a profit (this also is a capital gain).
Usually funds will give you a choice: it can send you payments for distributions and dividends (“Distributor” funds), or you can have them reinvested in the fund to buy more units (called “Accumulator” funds).
What should I look out for if I decide to invest in a fund?
You can’t open a newspaper or read a magazine without seeing adverts promoting the performance of collective investment schemes. But past performance is not as important as you might think, especially the short-term performance of relatively new or small schemes. As with any investment, a fund’s past performance is no guarantee of its future success. That said, however, volatility of past returns is a good indicator of a fund’s future volatility. Over the long-term, the success (or failure) of your investment in a fund will depend on a number of other factors.
Read the fund’s prospectus and shareholder reports, and consider these hints:-
Check total return: You will find the fund’s total return in the financial highlights, usually in the front of the prospectus or the annual financial statements published by the fund. Total return measures increases and decreases in the value of your investment over time, after subtracting costs (you will usually find it written as “Net Return”). When expressed as a percentage, net return for an indicated period is calculated by dividing the change in a fund’s *net asset value, assuming reinvestment of all income and capital gains distributions, by the initial price.
See how the net return has varied over the years: The financial highlights show yearly total returns for the most recent five or 10 year period. Looking at year-to-year changes in total return is a good way to see how stable the fund’s returns have been.
Scrutinise the fund’s fees and expenses: Funds charge investors fees and expenses – which can lower your returns. For example, if on an investment of €5,000, you have to pay a front-end fee of 2% ( €100), the actual amount invested would be €4,900. This means that if you wish to realise an adequate return, the fund would need to achieve a return which would at least get back the fee that you paid initially. Find the section in the fund’s prospectus where the costs are laid out.
Usually, fees fall under two main categories: sales load and transaction fees (paid when you buy, sell, or exchange your units), and ongoing expenses (paid while you remain invested in the fund).
Sales Load and Transaction Fees: No-load funds do not charge sales loads.
Front-end load: A front-end load is a sales charge you pay when you buy units. This type of load reduces the amount of your investment in the fund.
Back-end load: A back-end load is a sales charge you pay when you sell your shares.
It usually starts out at a specified amount for the first year and gets smaller each year after that until it reaches zero (say, in year four of your investment).
Ongoing expenses: The section about fees tells you also the kind of ongoing expenses you will pay while you remain investing in the fund. The relevant section shows expenses as a percentage of the fund’s assets, generally for the most recent fiscal year.
Here, the section will tell you the management fee (which pays for managing the fund’s portfolio), along with any other fees and expenses.
Some funds also charge a performance fee. This annual fee – which is usually paid to the adviser of the fund – is applied by adding a percentage to the difference in the performance of the fund during the year compared to the performance with the previous year. The calculation of the fee may not be very straight forward and you will need the assistance of your intermediary if you want to know more about how this fee is calculated. In essence, this fee gives an incentive to the adviser of the fund to select the best securities on the market in which to invest. A better performance will mean that the adviser gets a larger share of the profits which the fund has generated.
A difference in expenses that may look small to you can make a big difference in the value of your investment over time. Many funds allow you to switch your units for units of another sub-fund within the same collective investment scheme. The fee section will tell you if there are any switching fees.
Having said the above there are many funds that do perform well. Ask your investment advisor for more information.
What other sources of information should I consult?
Read the sections of the prospectus that discuss the risks, investment objectives, and investment policies of any fund that you are considering. Funds of the same type can have significantly different risks, objectives and policies. You can get a clearer picture of a fund’s investment objectives and policies by reading its annual reports. If you are not receiving these reports, please contact your intermediary or the fund manager of the collective investment scheme for a copy.
You can also research funds at most reliable internet sites and investor journals or newspapers.
One final hint: Generally the success of your investments over time will depend largely on how much money you have invested in each of the major asset classes – shares, bonds and cash – rather than on the particular securities you hold. If you are choosing a Fund, you should consider how your interest in that fund affects the overall diversification of your investment portfolio. Maintaining a diversified and balanced portfolio is key to maintaining an acceptable level of risk.
What is an ETF?
The definition A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs Explained. Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does. By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you’d pay on any regular order. One of the most widely known ETFs is called the Spider (SPDR), which tracks the S&P 500 index and trades under the symbol SPY. More information about ETFs is available in the education articles section and also in the videos section.
What are Structured Products?
Structured Products are investments that are uniquely designed to provide investors with risk return, tax and diversification characteristics that are not generally available from traditional investments. They usually include products linked to equity, fixed-income, indexes, interest rates, commodities, mutual funds and hedge funds. They generally, but not always, involve a complicated series of cash flow or derivative transactions.