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3.6. Share market instruments

As we saw earlier there are two types of shares:

- Ordinary shares.

- Preference shares.

The latter are similar to PVBs in that they have a fixed maturity date (in most cases), a nominal / face value and a coupon (called a dividend). As these instruments are only available in large-denominations only the high net worth (HNW) members of the household sector invest in them (and in fact only a few of them).

Ordinary shares, on the other hand, are the bread of investors, small and large. The small investor may either hold shares directly or via investment vehicles (covered later).

An example of a share is presented in Box 3. The company had a share capital of £ 200 000 and each share had a nominal value of £ 1.0, meaning there were 200 000 shares issued. Thus, when the company was formed and its shares were subscribed for, its balance sheet presented as indicated in Box 4.

example of ordinary share

BOX 4: INITIAL BALANCE SHEET OF

BLAAUWBANK UNITED GOLD MINING COMPANY LIMITED (£)

Assets

Capital and liabilities

Bank deposit

200 000

Share capital

200 000

If the company invested its cash assets (= bank deposit) in a sound mining venture and made say a £ 40 000 after-tax profit the first year, and paid out dividends of half this, i.e. £ 20 000, each shareholder would receive a dividend of £ 0.10 per share (assume 100 pence per £) (£ 20 000 / £ 200 000). Mr de Villiers, the holder of the share certificate in Box 3, i.e. the holder of /investor in 100 shares, would have received a dividend of £ 10 (£ 0.1 x 100 shares). This equals a return of 10% over the period the shares were held (£ 10 / £ 100 x 100).

As we know, shares trade in the secondary market where price discovery takes place, and capital gains and losses can be made. Assuming the "market" (i.e. investors in general) reacted positively to the performance of the company and the dividend paid [= a dividend yield of 10% (£ 20 000 / £ 200 000 x 100)], the share price would have risen. If the "market" was expecting the share market norm for mining companies of a dividend yield of 5%, the share price could have risen to £ 2 per share. For new investors, the new share price delivers, based on the "historical dividend paid" (HDP), a dividend yield (DY) of 5%:

Thus Mr de Villiers HPR per share (P1 = selling price of share; P0 = purchase price of share; D = dividend per share) is:

As we will see later, while the share market delivers superior returns over the long-term, it is accompanied by a high level of risk. There is an immense variety of shares: Table 3 demonstrates the vast categories of shares internationally, according to industry, supersector, sector and subsector.

Industry

Supersector

Sector

Subsector

Oil & gas

Oil & gas

Oil & gas producers

Exploration & production

Integrated oil & gas

Oil equipment & services

Oil equipment & services

Pipelines

Basic materials

Chemicals

Chemicals

Commodity chemicals

Specialty chemicals

Basic resources

Forestry & paper

Forestry

Paper

Industrial Metals

Aluminium

Nonferrous metals

Steel

Mining

Coal

Diamonds & gemstones

General mining

Gold mining

Platinum & precious metals

Industrials

Construction & materials

Construction & materials

Building materials & fixtures

Heavy construction

Industrial goods & services

Aerospace & Defense

Aerospace

Defense

General industrials

Containers & packaging

Diversified industrials

Electronic & electrical equipment

Electrical Components & Equipment

Electronic Equipment

Industrial engineering

Commercial vehicles & trucks

Industrial machinery

Industrial transportation

Delivery Services

Marine Transportation

Railroads

Transportation Services

Trucking

Support services

Business support services

Business training & employment agencies

Financial administration

Industrial suppliers

Waste & disposal services

Consumer goods

Automobiles & parts

Automobiles & parts

Automobiles

Auto Parts

Tyres

Food & beverage

Beverages

Brewers

Distillers & Vintners

Soft Drinks

Food producers

Farming & fishing

Food products

Personal & household goods

Household goods

Durable household products

Nondurable household products

Furnishings

Home construction

Leisure goods

Consumer electronics

Recreational products

Toys

Personal goods

Clothing & accessories

Footwear

Personal products

Tobacco

Tobacco

Healthcare

Healthcare

Health care equipment & services

Health care providers

Medical equipment

Medical supplies

Pharmaceuticals & biotechnology

Biotechnology

Pharmaceuticals

Consumer services

Retail

Food & drug retailers

Drug retailers

Food retailers & wholesalers

General retailers

Apparel retailers

Broadline retailers

Home improvement retailers

Specialized consumer services

Specialty retailers

Media

Media

Broadcasting & entertainment

Media agencies

Publishing

Travel & leisure

Travel & leisure

Airlines

Gambling

Hotels

Recreational services

Restaurants & bars

Travel & tourism

Telecommunications

Telecommunications

Fixed line

telecommunications

Fixed line telecommunications

Mobile

telecommunications

Mobile telecommunications

Utilities

Utilities

Electricity

Electricity

Gas, water & multiutilities

Gas Distribution

Multiutilities

Water

Financials

Banks

Banks

Banks

Insurance

Nonlife insurance

Full line insurance

Insurance brokers

Property & casualty insurance

Reinsurance

Life insurance

Life insurance

Financial services

Real estate

Real estate holding & development

Real estate investment trusts

General Financial

Asset managers

Consumer finance

Specialty finance

Investment services

Mortgage finance

Investment instruments

Equity investment instruments

Equity investment instruments

Non-equity investment instruments

Non-equity investment instruments

Technology

Technology

Software & computer services

Computer Services

Internet

Software

Technology hardware & equipment

Computer Hardware

Electronic Office Equipment

Semiconductors

Telecommunications Equipment

Basic data obtained from: jse.co.za

Table 3: FTSE / DOW Jones industry classification system (industry classification benchmark - ICB)

 
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