What Are Shares?

Shares, also known as stocks or equities, represent ownership in a company. When you purchase shares of a company, you are essentially buying a portion of that company, making you a shareholder. Shares are a way for companies to raise capital from the public in exchange for partial ownership.

Types of Shares

Ordinary Shares: These are the most common type of shares issued by companies. Ordinary shareholders have voting rights in company decisions and receive dividends, which are payments made from the company's profits. However, dividends are not guaranteed and are usually paid out at the discretion of the company.
Preference Shares: Preference shareholders receive dividends before ordinary shareholders and typically at a fixed rate. However, they usually do not have voting rights. In the event of liquidation, preference shareholders are paid before ordinary shareholders but after creditors.
Bonus Shares: These are additional shares given to existing shareholders at no extra cost, usually issued from the company’s retained earnings. Bonus shares increase the number of shares a shareholder owns but do not increase the total value of their holdings.
Rights Shares: These are additional shares offered to existing shareholders at a discounted price, usually to raise more capital for the company. Shareholders can choose to buy these shares or sell their rights to those willing to buy them.

How Companies List at the NSE

Listing on the Nairobi Securities Exchange (NSE) allows companies to offer their shares to the public and trade them on the exchange. The process of listing involves several steps and strict regulatory requirements:

Preparation Stage

Financial and Legal Preparation: The company must ensure it meets the financial and legal requirements set by the Capital Markets Authority (CMA). This includes having a minimum level of profitability, a track record of financial performance, and proper corporate governance structures.
Hiring Advisors: Companies typically hire investment banks, legal advisors, and auditors to help them prepare for the listing. These advisors assist with due diligence, preparing financial statements, and ensuring compliance with regulations.

Initial Public Offering (IPO)

Prospectus: The company prepares a prospectus, a detailed document that provides potential investors with information about the company’s business, financial performance, and the terms of the share offering.
Valuation: The company, with the help of its advisors, determines the price at which its shares will be offered to the public. This is done through valuation techniques that consider the company's assets, earnings, and market conditions.
Public Offering: The company offers its shares to the public through an IPO. Investors can apply to buy shares, and the company allocates them based on demand. If applications exceed allocations, refunds are issued to the applicants.

Listing and Trading

Listing Approval: After the IPO, the NSE reviews the application to ensure all regulatory requirements are met. Once approved, the company’s shares are listed on the NSE.
Commencement of Trading: Once listed, the company’s shares can be bought and sold on the NSE. The share price is determined by market forces, with prices fluctuating based on supply and demand, company performance, and broader economic factors.

How One Becomes a Shareholder

Becoming a shareholder is a straightforward process:

Step 1: Opening a CDS Account

To buy shares on the NSE, you must open a Central Depository System (CDS) account. This account holds your shares in electronic form and can be opened through a stockbroker or investment bank.

Step 2: Choosing a Stockbroker or Investment Bank

A stockbroker or investment bank acts as an intermediary between you and the NSE. You can choose a stockbroker or investment bank based on factors such as fees, services offered, and their reputation. Some brokers also provide online trading platforms for convenience.

Step 3: Researching Companies

Before buying shares, it's important to research the companies you're interested in. This involves analyzing their financial performance, industry position, and growth prospects.

Step 4: Buying Shares

Once you've selected a company, you place an order to buy shares through your stockbroker. You can place a market order (buying at the current market price) or a limit order (buying at a specified price).

Step 5: Becoming a Shareholder

Once your order is executed, you officially become a shareholder of the company. Your shares are held in your CDS account, and you will start enjoying the benefits of share ownership, such as receiving dividends and voting rights.

The Role of a Shareholder

Shareholders play a crucial role in the governance and success of a company. Their rights and responsibilities include:

Voting Rights

Shareholders, particularly those holding ordinary shares, have the right to vote on important company matters. These include electing the board of directors, approving mergers and acquisitions, and making decisions on major corporate actions. Each share typically grants one vote, so shareholders with more shares have more influence.

Dividends

Shareholders are entitled to receive dividends, which are portions of the company’s profits distributed to its owners. The company’s board of directors decides the dividend amount and frequency. Dividends can be paid in cash or additional shares called bonus shares.

Capital Gains

If the company performs well, the value of its shares may increase. Shareholders can sell their shares at a higher price than they paid, making a profit known as a capital gain. However, the value of shares can also decrease, leading to potential losses.

Participation in General Meetings

Shareholders have the right to attend the company’s Annual General Meeting (AGM) and any Extraordinary General Meetings (EGMs). These meetings provide a platform for shareholders to ask questions, express their views, and gain insight into the company’s performance and strategy.

Influence on Company Strategy

While the day-to-day management of the company is handled by the board of directors and executives, shareholders have a say in the company’s long-term strategy. By voting on key issues, shareholders can influence the direction the company takes.

Protection of Rights

Shareholders have legal rights that protect their interests, including the right to fair treatment and access to information about the company. If a company engages in practices that harm shareholders, they have the right to seek legal recourse.

Risk Bearing

Shareholders bear the risks associated with the company’s performance. If the company does well, shareholders benefit from dividends and capital gains. If the company performs poorly, shareholders may experience losses, and in extreme cases, the company could go bankrupt, leading to the loss of their entire investment.

Conclusion

Shares represent ownership in a company, and becoming a shareholder involves purchasing shares, usually through a stock exchange like the NSE. Companies list their shares on the NSE to raise capital, and shareholders play a key role in the governance and financial success of these companies. Understanding the process of becoming a shareholder and the responsibilities that come with it is essential for anyone interested in investing in the stock market.