Meaning of Security
A security is a financial instrument or asset that represents a financial claim, ownership interest, or debt in an individual, company, government, or other organisation. Securities are bought and sold by investors in financial markets and may provide returns through interest, dividends, or an increase in value.
Common examples of securities include ordinary shares, preference shares, bonds, debentures, and Treasury bonds.
For example, when a person buys shares in a company, the shares represent part ownership of that company, while a bond represents money lent to the issuing government or organisation.
Ordinary Shares
Ordinary shares are units of ownership in a company that are issued to members of the public or other investors in exchange for capital. A person who buys ordinary shares becomes a part-owner of the company and is known as a shareholder.
Ordinary shareholders may receive dividends from the company's profits, although the amount of dividend is not usually fixed and may depend on the company's performance and decision to distribute profits.
They may also have voting rights, allowing them to participate in certain decisions of the company. Ordinary shareholders bear the risks of the business but may benefit if the value of their shares increases.
Features of Ordinary Shares
1. Ordinary shares represent ownership:
An ordinary share represents a unit of ownership in a company. When a person buys ordinary shares, the person becomes a shareholder or part-owner of the company.
The number of shares owned determines the person's proportion of ownership. For example, if a company has 1,000 shares and a person owns 100 shares, that person owns 10% of the company.
2. Shareholders may receive dividends:
Ordinary shareholders may receive part of the company's profit in the form of dividends. However, dividends on ordinary shares are not guaranteed.
The amount paid depends on the company's profit, financial position and the decision of the company to declare dividends. A company may decide to retain its profit for expansion instead of paying dividends.
3. Dividends are not usually fixed:
Unlike some preference shares, ordinary shares generally do not have a fixed dividend rate. The dividend may increase, decrease or be completely omitted depending on the company's performance and dividend policy.
For example, a profitable company may pay ₦2 per share one year and ₦3 per share the following year.
4. Ordinary shareholders may have voting rights:
Ordinary shareholders usually have the right to vote on important matters affecting the company. Voting may take place at shareholders' meetings and can include matters such as the election of directors or approval of certain major corporate decisions.
Largely, the more ordinary shares a person owns, the greater the person's voting power.
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5. Shareholders bear business risk:
Ordinary shareholders bear the risks associated with the performance of the company. If the company performs well, shareholders may benefit through dividends and an increase in the market value of their shares. However, if the company performs poorly, dividends may fall or disappear and the value of the shares may decline.
6. Ordinary shareholders may benefit from capital gains:
An ordinary shareholder can make a capital gain if the market price of the shares increases above the price at which the shares were purchased.
For example, if a person buys shares at ₦10 per share and later sells them at ₦15, the person makes a ₦5 gain per share, before considering transaction costs and taxes.
7. Ordinary shareholders are paid last during liquidation:
If a company is wound up, ordinary shareholders generally receive whatever remains after the company's debts and other claims have been settled.
Creditors and other claims with priority are paid first. Therefore, ordinary shareholders have a higher risk of losing their investment if the company has insufficient assets to meet its obligations.
8. Ordinary shares are generally transferable:
Ordinary shares can generally be transferred from one investor to another, subject to the company's rules and applicable regulations.
In a listed company, shareholders can normally sell their shares through the securities market. This transferability makes it possible for investors to convert their investment into cash by selling their shares.
Summary
Ordinary Shares
Represent ownership in a company.
Holders are called shareholders.
May give voting rights.
Dividends are generally variable.
Shareholders benefit if the share price increases.
Ordinary shareholders generally rank after creditors and preference shareholders in liquidation.
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