Most people who begin their adventure with the stock market start by investing in stocks. Therefore, it’s worth understanding what characterizes these securities, the different types of stocks, and why companies issue them.

Contents:

• What are shares and why do companies issue them?
•  When does a joint-stock company become public?
• Types of shares and how they are classified
•  How to determine the value of shares
• Issue price vs. Market price
•  Primary Market vs. Secondary Market
• Why Do Investors Buy Shares?
• The Risks of Investing in Shares
• Diversification
• THERE IS NO PROFIT WITHOUT RISK, BUT RISK MUST BE MANAGED

What are shares and why do companies issue them?

Shares are a type of equity security. This means that when you buy shares, you are buying ownership in a company. You become a co-owner of that company, gaining co-ownership rights, the right to receive dividends, and the right to participate in general meetings of shareholders.

Companies issue shares to raise capital for business development, often at a relatively low cost by selling new shares. Investors, on the other hand, buy shares because they expect the company to grow and, as a result, for the share price to increase. Dividend payments, which are portions of the company’s profit, also positively influence investors’ willingness to buy shares.

After issuing new shares, a company’s capitalization (its overall market value) increases by the amount raised from the new issue.However, existing shareholders who do not buy additional shares end up holding a smaller percentage of ownership in the company. It’s crucial that the company uses the raised funds effectively, allocating them toward further development rather than wasting them.

Investors who own shares in a company can participate in General Shareholders’ Meetings and, to some extent, decide the fate of the company. Naturally, the largest shareholders, those who hold significant blocks of shares, have the greatest influence.

When does a joint-stock company become public?

When a joint-stock company debuts on the stock exchange, it becomes a public company. It is then subject to additional regulations and must submit regular reports on its activities. The benefits of going public include an enhanced company image and increased credibility in the eyes of business partners and potential customers. A stock exchange listing also provides a market valuation of the company, making it significantly easier to change its ownership structure.This means that existing shareholders can more easily sell their shares, and new investors can buy them.
 As a result, ownership becomes more fragmented. In some cases, the current owner may have to share control of the company with someone who has acquired a significant block of shares. At the time of a stock exchange debut, the risk of losing control through a hostile takeover increases. To prevent this, major shareholders (often the company’s founders) retain so-called controlling blocks of shares.

A controlling stake refers to the number of shares required to exercise sole control over a company. This means the main shareholder owns more shares than all other shareholders combined. In the event of disagreements, they have the voting power to push through their own ideas for the company’s future development.

Types of shares and how they are classified

Shares can be divided into two types, depending on the method of transferring ownership:

Registered shares are those to which specific natural or legal persons are entitled, as indicated in the share document. A natural person must be listed by name and surname, and a legal person is the name of the company. Registered shares usually belong to the founders of the company and are not typically admitted to trading on the stock exchange.

Bearer shares are not linked to a specific person and do not contain any information about the shareholder. These are the types of shares that are listed on stock exchanges.

Securities such as shares can also be divided into ordinary and preference shares, depending on the rights of shareholders.

Ordinary shares represent fractional ownership of the share capital, granting shareholders certain rights, including:

• Participation in the general meeting with the right to vote
• The right to receive a dividend
• The right to subscribe for new shares
• The right to a portion of the company’s assets in the event of liquidation

Preference shares grant their holders special rights, such as:

• The right to vote at the general meeting
• The right to receive dividends
• The right to a portion of the company’s assets in the event of liquidation

Sometimes, you may encounter a so-called golden share. This type of share carries special rights and may, for example, include the right to veto decisions at the General Meeting of Shareholders. Golden shares are often held by the founders of a company or by individuals who are prominent within the company.

How to determine the value of shares

A novice investor may feel disoriented and have difficulty understanding which price reflects the current value of a company, such as the nominal price, issue price, market price, or book price of shares. Additionally, it’s important to differentiate between the market value and book value of a company. Understanding these concepts is essential for anyone who wishes to consider themselves a stock investor.

Each company’s shares have a nominal value, which is calculated by dividing the company’s share capital by the number of issued shares. The minimum nominal value cannot be less than one grosz. This value is often significantly different from the current market value of the share listed on the stock exchange.

If a company decides to go public and list its shares on the stock exchange, the shareholders must decide whether to sell the shares they already hold or issue a new series of shares to new shareholders. During the General Meeting of Shareholders, a resolution is passed to issue new shares, and the issue price at which the company intends to sell these shares is determined.

Issue price vs. Market price

The issue price of shares is the price at which shares are sold during the issuance of new shares, and it cannot be lower than the nominal price.

The current value of shares, or market price, is determined during stock exchange sessions. It results from the interplay of supply and demand for a given security. The current price depends on whether a transaction between buyers and sellers takes place and at what price it is concluded.

By knowing the current market price and the number of shares issued, we can determine the company’s capitalization, or market value.

The book value of a company can be found on its balance sheet. It represents the value of the company’s assets. By dividing it by the number of shares issued, shareholders can determine the book value per share.

By knowing the market price of a share and its book value per share, an investor can assess whether the company is undervalued or overvalued on the stock exchange. If the market price of a share is significantly higher than the book value, it may indicate that the shares are overpriced, meaning the company is overvalued. Conversely, if the market price of a share is significantly lower than the book value, it may suggest that the shares are undervalued, meaning the company is priced cheaply.

Primary market vs. Secondary market

When a company decides to issue new shares, it sells them through brokerage firms. The funds raised in this manner are deposited into the company’s account. This transaction is considered to take place on the primary market, and only then does the company raise capital to fund its business development.

Investors who entrusted their money to the company during the issuance of shares can retrieve it by selling those shares on the stock exchange. Trading in shares occurs on the Stock Exchange, also known as the secondary market. Investors buying and selling shares no longer provide capital to the company that issued them; they simply settle transactions with one another. It is crucial to understand that for an investor to buy a particular share, there must be someone willing to sell it.

Shares of listed companies are purchased on the stock market from other market participants.

Current share prices can be checked on the GPW website under the GPW Main Market – Shares and PDA section.

Why do investors buy shares?

To freely buy and sell shares, you need to set up an investment account with a brokerage firm licensed by the Polish Financial Supervision Authority (country dependent) (should I even include this paragraph?). By owning shares, you become a co-owner of a portion of the company’s assets, in proportion to the total number of shares issued by the company.

Investors buy stocks primarily for two reasons. First, they expect the market value of the stock to increase, allowing for a profitable resale. Second, investors anticipate regular dividend payments when the company generates profits.

It’s important to note that a company may choose to share its profits with shareholders, but it is not obligated to do so. This is why it’s advisable to review a company’s dividend payment history before investing. It’s also helpful to check whether the company has an established dividend policy that outlines what percentage of profit will be allocated to dividend payments if a profit is made in a given financial year.

When you buy shares of a company, you become one of its shareholders. It’s important to understand that the company’s actions will eventually affect its value—and, in turn, the price of its shares. Before investing in a specific stock, you should consider the company’s financial situation, its investment plans, the outlook for the industry it operates in, the experience of its management, and other key factors.

The risks of investing in shares

Investing in stocks naturally involves risk. Sometimes a company’s plans may fail, leading to the mismanagement of the capital entrusted by investors. Poor management decisions or unfavourable market conditions may, in extreme cases, result in the company’s bankruptcy and the total loss of invested capital.

It’s important to thoroughly analyse a company and assess the level of risk in order to make informed investment decisions. Naturally, selecting listed companies independently requires appropriate skills and knowledge. However, with a willingness to learn and a bit of discipline, investment risk can and should be managed.

Investing in stocks involves risk, and this is something you have to accept. However, that doesn’t mean the risk can’t be controlled. It should be managed right from the planning stage of the transaction. You need to know what level of risk you’re willing to take when investing your money.

Diversification

Everyone has a different tolerance for accepting losses. For some investors, a 20% loss may not be alarming, while for others, even a 5% drop in their account balance can be shocking. Additionally, the size of the cash balance matters. A 20% loss on PLN 1,000 is PLN 200, while a 5% loss on PLN 100,000 is PLN 5,000. To feel comfortable with investment decisions, it’s important to only expose as much money to risk as you can afford to lose. An open position should neither be too small nor too large. If the open position is small, we won’t pay much attention to it. Both profits and losses will have little impact on us. On the other hand, a position that’s too large can stir up too many emotions. The normal market volatility may affect our investment decisions, leading to the premature closing of both losing and winning positions.

To effectively diversify your investment portfolio, consider adding other financial instruments. Don’t overlook securities like bonds or ETFs.

Every investor needs to remember that:

THERE IS NO PROFIT WITHOUT RISK, BUT RISK MUST BE MANAGED

Investing in stocks requires opening a brokerage account. Before choosing a broker, it’s important to analyse the costs, including account setup and maintenance fees, as well as the commission for stock trades. Access to analytical tools provided by the broker is also crucial. However, we don’t need to worry about the type of stock we buy in a given company, as all stocks listed on exchanges and admitted to trading are ordinary bearer shares.

We encourage you to visit our website regularly and expand your knowledge.