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4. Defensive Stocks These are stocks whose prices stay stable when market declines, do well during recessions and are able to minimize risks. They perform perfect when market turns sour and are in requisition during economic boom.
These categories are widely spread in mutual funds, thus for better understanding investment process it is useful to keep in mind this division.
Shares can be issued both within country and abroad. In case a company wants to issue its shares abroad it can use American Depositary Receipts (ADRs). ADRs are usually issued by American banks and point at shareholders’ right to possess shares of a foreign company under asset management of a bank. Each ADR signals of one or more shares possession.
When operating with shares, aside of purchase/sale ratio profits, you can also quarterly receive dividends. They depend on: type of share, financial state of company, shares category etc.
Ordinary shares do not guarantee paying-off dividends. Dividends of a company depend on its profitability and spare cash. Dividends differ from each other as they are to be paid in a different period of time, with possibility of being higher as well as lower. There are periods when companies do not pay dividends at all, mostly when a company is in a financial distress or in case executives decide to reinvest income into development of business. While calculating acceptable share price, dividends are key factor.
Price of ordinary share is determined by three main factors: annual dividends rate, dividends growth rate and discount rate. The latter is also called a required income rate. The company with high risks level is expected to have high required income rate. The higher cash flow higher share prices and versus. This interdependence determines assets value. Below we will touch upon division of share prices estimating in three possible cases with regard to dividends.
While purchasing shares, aside of risks and dividends analysis, it is absolutely important to examine company carefully as for its profit/loss accounting, balance, cash flows, distribution of profits between its shareholders, managers’ and executives’ wages etc. Only when you are sure of all ins and outs of a company, you can easily buy or sell shares. If you are not confident of information, it is more advisable not to hold shares for a long time (especially before financial accounting published).
Dr. Goldfinger www.financegates.com
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