Financial Literacy for All- Occupational Pension Schemes

Whose interest do you serve? Is it your own alone or that of your own and that of your fellow?

Day after day, toddlers become teens. Month after month, teens become adults. Year after year, adults become old. In a natural system of human life, man passes through stages of life from birth to death.

Living life without planning as a human being makes the ant that stores food during harvest seasons and has enough to eat during drought, a wiser animal. We cannot but must accept that as mortal beings, we would grow old and a time will come when we would not be able to work actively, hence we should store some “food” for consumption when we become old. Many, however, would like to consume everything today, saying that life is all about today and adding that tomorrow will bring its own.

In the civilized world of man, leaders of some countries like the United States of America instituted some financial schemes that they thought would help workers of various organizations in their country. This began in the industrialization age and most of the decisions of these so-called financial schemes purported for the benefits of the contributors were taken by the-powers-that-be mostly without the knowledge or involvement of the supposed beneficiaries. These financial decisions most probably were taken with utmost good faith for the beneficiaries but as man is getting complex every minute, the decisions that were taken by politicians became and backed by laws that do not catch up with the complexity of entrepreneurs and the-fast-changing spirits of entrepreneurs with a zeal to innovate and come out with something new every minute. Entrepreneurs have been always outwitting politicians and that is why politicians are called bureaucrats. Entrepreneurs are intelligently sophisticated and dynamic.

Governments would always come out with decisions regarding the citizenry but not all of these decisions would be beneficial to the well-being of the people.  Governments all over the world have realized that the masses always depend on governments for many decisions. Even personal decisions that affect them directly and government has no clue whatsoever, they want government to take those decisions for them and in that case government, being a political setup that needs power every year, would try to do something for the people and in trying, governments mostly end up taking some of these decisions. Such decisions look good superficially but in the long run the people get shortchanged but the laws would have been established and could not be changed easily especially where governments now become the beneficiaries, then those laws would stay in the statute books for zillion years. 

The institution of occupational pension schemes could have been a blessing the way it began. It was completely different from how it is done today in the 21^st century and beyond. 

Social Security Contributors

“I didn’t know that painters and writers retired. They’re like soldiers – they just fade away.”  (Lawrence Ferlinghetti)

In Ghana, social security contributions are done by the employer, which contributes 13% percentage and the employee, which contributes 5.5% making a total of 18.5% to the fund for the benefit of both the employee and the employer. You would understand how the employer, especially the government actually, greatly benefits even more than the employee as we go along.

Who benefits more, Employee or Government?

We are made to believe that the 13% contributed by the employer is not your money but money from the employer, so it is given to you free of charge. Do we have anything free on earth? If it is that free then why don’t they contribute some for the destitute in the streets, who need some financial help but do not get? I know you would say the laws do not allow that, but why don’t they make the laws to allow for that?  It is because, the employer, the government for that matter is the greater beneficiary, it has conditioned you to believe that it is seeking for your best interest but indirectly it is seeking for its own interest for more money from you in various ways to spend on productive and unproductive ventures.

The truth is that the total of the 18.5% is the employee’s money yet many employees are ignorant of this and keep saying that my organization contributes 13% for me. The Bible says for lack of knowledge people perish. Since the masses always refuse to learn, they would always lack knowledge in many areas that do not require even in-depth learning. Social security contribution is another form of tax and it is the employee’s money that is being taxed. It cannot therefore be true, that it is the employer that adds the 13% free of charge. It is a form of tax deducted and some given back to you later down the years when its value would have been devalued by inflation and other economic money eaters.

Now, the law in many countries says, though, it is your own money you are contributing, you cannot touch it till you are old enough to be wise to handle that much before some percentage is given to you to go home to waste it by returning it to them or till you are in your grave so it could be given to someone you chose or did not choose to waste it and return it to them.

As you contribute the money for many years before some part is given back to you, government gets paid monthly by you to help it embark on some projects; let’s say investment projects purported to increase the value of your money. However, in occupational pension scheme laws, most contributors do not get increased returns in the form of compound interests, yet their money would be used for investment projects that yield compound interests. Who gains more?

Lump sum given to contributors without training

I keep asking the question, why is it that money is being kept aside to be given to people later in life but these people, who would be the beneficiaries of the money, are not given some kind of training on how to manage their hard-earned money? 

Once, some lump sum would be automatically given to a contributor later down the years then some training should be given to such a person periodically to help him/her make wise use of the money in order to live a dignified life if that was the real purpose for which it was contributed.

Training in Entrepreneurship and Financial Literacy is not given to these people and all they do is leave their money with the banks that give them peanuts as interests or they people would try to invest into projects that they never have knowledge about them and later fail woefully. I have learnt there is no bad investment, but there is a bad investor. You cannot wake up and invest into any venture that you do not know inside out. You would fail badly.

While, no knowledge is gained in Financial Literacy and or Entrepreneurship and other critical every day subjects, people retire and within a short time all their retirement money is given back to governments through ignorance and lack of training on money matters. Who benefits more?

Provident Fund

Under the new Pension Act in Ghana, provident fund, which is a voluntary fund contributed by the employee and again by the employer, though actually contributed by the employee is also given to fund managers to manage for contributors.

I do not know why those who copied this old thing which seems new in Ghana think it is the best for Ghanaians? Many employees in those countries that first introduced these schemes know very well that it is never the best way for them. Their own money is handed over to third parties by the powers of some laws while they stand somewhere and watch their money being manipulated by outsiders. If they want to withdraw their money before five years (informal sector) or ten years (formal sector) as is the case in Ghana now, then taxes are paid thereby tying many not to withdraw because the law says  that you would lose once you withdraw before these years depending on the sector you find yourself. Why should people be restricted to getting their own money that they have voluntarily contributed?

Once, social security is said to be handled by governments on behalf of the contributors and governments are supposed to seek for the best interests of the citizenry, it would be assumed decisions of governments would favour the masses. Though most governments’ decisions do not favour the masses, and it is not surprising that governments are changed often through elections or illegal violence in many countries because the people feel unhappy about governments’ actions and inactions.

What about private entities that are licensed by the governments to collect these provident funds from organizations to manage them for their contributors. Provident fund, being a private initiative and voluntary contributory fund should not be tied to government laws that take years to change. Everybody knows that laws enacted do not changed easily and take time and some even remain in the statute books forever, though man does not live forever. God has made change permanent; yet man has refused to admit that change is permanent.

Provident fund is by law in Ghana supposed to be managed by pension fund management companies licensed by the National Pension Regulatory Authority (NPRA), yet no option is given to organizations that even have competence, expertise and financial intelligence to manage their own funds.

Governments in Control

The National Pension Regulatory Authority (NPRA) has been set up by a parliamentary act to help pension fund management companies to manage tiers 2 and 3 as the Social Security and National Insurance Trust (SSNIT) manages the tier 1. All pension manager companies would have to be legally licensed by the NPRA to be able to operate as pension fund managers. As these companies pay for licenses that are renewable then government would continue to regulate them by charging them increased license fees.

The fund managers, being financially literate, would pass all these costs to the employee or the contributor in the forms of fees. The employee would now help create jobs for many people and especially the fund managers and that is how come fund manager companies have sprung up since 2010, as the act was passed in 2008,but gave one year, 2009 as grace period for onwards transmission. Many pension fund manager companies have been set up recently to compete to manage cheap funds from contributors but as to whether they all have the technical know-how and financial intelligence to manage the employee second and third tiers, only time will tell.

Greatly, government is in control and those pension fund management companies that would mess up would be punished and made to pay huge penalties to the government and that would be that another source of some kind of revenue for government, as many are expected to do well not for the real benefits of the contributors, but their own survival, the government would continue to be the greatest beneficiary, as the funds are controlled by organizations being controlled by the government.

We know that where you have no control over your own money or asset you have no real say about its use or misuse. The employee, who actually owns the funds, is being mandated by this new pension act to:

        ·            Know information about your payroll deduction arrangements with your employer.

        ·            Know how much is deducted from your contribution or how much contribution you pay to the scheme.

        ·            Know contact details of trustee of scheme, such as name of representative of company, phone and fax number and email.

These are all the employee needs to know, not even do but only know, yet without the employee working, all the other stakeholders cease to exist. How come, the one supposed to be the most powerful is being relegated to the ground? These three bullet points above do not say anything about the real interest of the employee and these do not empower the employee to take decisions on his, own sweat, his own money.

Contributions are done individually according to each basic salary, yet the individual has no power to take decisions on the money he/she alone has contributed, those, who did nothing for the fruition of the cash are the ones, that even have power and authority to decide for the employee. The absolute power should have rested with the contributor to decide what s/he wants to do with his/her money but the irony of man-made life is what prevails.

                            Types of occupational Pension Schemes

“It appears history is going to keep happening, despite our hopes for retirement.” (Gregory Maguire, Out of Oz)

Defined benefit plans

According to Wikipedia “A traditional defined benefit (DB) plan is a plan in which the benefit on retirement is determined by a set formula, rather than depending on investment returns. A traditional pension plan that defines a benefit for an employee upon that employee's retirement is a defined benefit plan. In the U.S., corporate defined benefit plans, along with many other types of defined benefit plans, are governed by the Employee Retirement Income Security Act of 1974 (ERISA)

Traditionally, retirement plans have been administered by institutions which exist specifically for that purpose, by large businesses, or, for government workers, by the government itself. A traditional form of defined benefit plan is the final salary plan, under which the pension paid is equal to the number of years worked, multiplied by the member's salary at retirement, multiplied by a factor known as the accrual rate. The final accrued amount is available as a monthly pension or a lump sum, but usually monthly.

The benefit in a defined benefit pension plan is determined by a formula that can incorporate the employee's pay, years of employment, age at retirement, and other factors. A simple example is a Dollars Times Service plan design that provides a certain amount per month based on the time an employee works for a company. For example, a plan offering $100 a month per year of service would provide $3,000 per month to a retiree with 30 years of service. While this type of plan is popular among unionized workers, Final Average Pay (FAP) remains the most common type of defined benefit plan offered in the United States. In FAP plans, the average salary over the final years of an employee's career determines the benefit amount.
Defined Pension Contribution

“Retirement plans may be classified as defined benefit or defined contribution according to how the benefits are determined.  A defined benefit plan guarantees a certain payout at retirement, according to a fixed formula which usually depends on the member's salary and the number of years' membership in the plan. A defined contribution plan will provide a payout at retirement that is dependent upon the amount of money contributed and the performance of the investment vehicles utilized.”

“Some types of retirement plans, such as cash balance plans, combine features of both defined benefit and defined contribution plans. They are often referred to as hybrid plans. Such plan designs have become increasingly popular in the US since the 1990s.”

Defined contribution plans

Wikipedia again explains that “In a defined contribution plan, contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, sometimes through the purchase of an annuity which then provides a regular income. Defined contribution plans have become widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of defined benefit plans in the US has been steadily declining, as more and more employers see pension contributions as a large expense avoidable by disbanding the defined benefit plan and instead offering a defined contribution plan.”

 The Future of occupational Pension Schemes

 “A corporation's responsibility is to the shareholders, not its retirees and employees. Companies are doing everything they can to get rid of pension plans and they will succeed” (Ben Stein)

As we live in the information age and information abounds away from just a tap on a button, people get easily informed through various means of sharing information.

This century is the beginning of mass entrepreneurship where everyone would be their own employers and people would determine how much they would want to pay themselves. As people determine how they want to pay themselves, they make sure they would not pay huge sums of money monthly or periodically to organizations they do not have control to manage the cash for them.

The amount of pension occupational contributions will reduce as people get financially wise by knowing that the best people to take control and decisions on their hard-earned cash are they, themselves. Once the people have the power to determine how much to pay themselves, they would give themselves small basic salaries and pay small social security contributions, so that they could plough back what is left into their businesses for growth and expansion for better returns.

Again, until people feel that they are getting the value for their money as contributors and be content with the services of pension fund managers old or new companies, people would find legal means of contributing meager amounts as social security for themselves and keep back the bigger part in their businesses for better investments to yield more income.

It is a known fact that even today, in 2014 many organizations, even government institutions, some autonomous, some semi-autonomous are not paying social security contributions of some members of staff, they being permanent or temporary staff. Many private companies are even doing worse even in 2014, many companies do want to be paying these contributions and want to employ workers as contract staff, being renewable or not. When would it become convenient for employers to want to pay for the social security contributions of their members of staff?

Organizations are now adopting ways and means of cutting employee costs to the detriment of the employee.

The jobs that are there have been taken over by robots and monkeys. Monkeys are trained to work in some instances like human beings and you know they would not demand for wages as far as you feed them well. Haha! We already know what robots are doing. They have replaced human beings in some fields. Hmm!

The future of occupational pension schemes look bleak and it will never be long, say the next thirty to fifty years, when many pension fund management companies in most countries will go bankrupt as they will need more money from their own investments or funds from the government to pay existing and entitled pensioners because the amount of pension contributions would have reduced drastically to sustain them. That is why many financially intelligent people say workers’ social security schemes are licensed ponzi schemes. If all contributors stop contributing in even a month, I bet you pension fund managers would find themselves wanton to pay pensioners. What about if all contributors stop contributing for a year or two? Disaster will break loose and pensioners will go to their graves earlier. I know they would try to defend themselves by saying that they are prepared to handle pensioners’ pensions but for how long could they continue if the amount of pension contributions reduces quickly compared to what has already been collected and needs to be returned to contributors or pensioners.

The future of occupational pension scheme:

“We cannot continue. Our pension costs and health care costs for our employees are going to bankrupt this city” (Michael Bloomberg)

        ·            Governments all over the world are distancing themselves from many social issues and very soon they would distance themselves from the social security issues of the worker. Governments these days do not even want to employ and if they are not employing then how many private companies would have the capacity to employ people in masses in this information age, where super technology exists and performs faster and more efficiently.

        ·             Many government institutions would be turned private and employ few efficient people to deliver.

        ·            Many private organizations do not want members of staff to be unionized to form formidable bargaining powerhouses, so these companies deal with workers individually and pay peanuts to workers individually. Social security amounts are therefore dwarfed in such organizations.

        ·            Many organizations are now employing workers on contract basis for periods and contracts are drafted in such ways that social security for those workers would not be paid.

        ·            This is a century of entrepreneurship and many people would be their own employers, and for that matter they would determine how to pay themselves. They would declare small basic salaries to pay small social security contributions. No law would compel an organization to pay more than it can afford.

        ·            People are becoming financially literate and financially intelligent that they would like to manage their own money, rather than give it to someone else to manage it for them. People want to be deeply and daily involved in decisions concerning their money but this does not happen with pension management as individual contributors do not have capacity to get involved in decisions about their money. They just have to trust the government and its licensed fund managers for results, good or bad. Results, appreciable, constant or devalued.

        ·            Robots and computers have already helped reduced the number of people engaged in any organizational setup; hence few people are employed contributing small amount for social security.

        ·             In this century more organizations will become internet based and would make so much money with just one or two employees. Though these companies would be multi-billionaire-dollar companies, they would pay zilch as social security because they would not need to employ physical human hands to make money. Online businesses have come to stay and people would do almost everything online from their homes, all the people, who would have been employed with such businesses would not be needed. Social security contributions are cut and reduced.

        ·            There are bureaucratic practices in getting one’s pension contributions on retirement in some countries like Ghana, even in the 21^st century, where software and systems help make things easier and convenient and participatory for all stakeholders, the fund managers still waste contributors time, energy and money on many unnecessary procedures before giving one’s money to one.

        ·            People feel the fund managers are not taking good care of their hard-earned money and that the returns they get after many years of contributing do not match what their sweat should have produced. Contributors would have to depend on the independent work of professional auditors to know the welfare of their funds. Accountability and transparency become difficult when managers are different from owners. Third party independent opinions have not always been the best as cases such as those of Enron and WorldCom and others were seen.

        ·            People now know the differences among security, comfort and freedom and they would opt for comfort and freedom by planning for them instead of security. Security is meant for people in prison or prisoners not pensioners who want to have free air to enjoy life before joining their ancestors. If you plan your retirement on your social security contributions alone, then it is like you actually agree they should turn you, a pensioner into a prisoner with security secured around you. You would be helpless and hopeless and not even your children or the government of the day could get you out of that prison because it would be beyond their own financial means to do that.

The way forward for workers

Life will call you back home from the fields of work when you can no longer afford to be in the fields for anything good. Retirement seriously stares in the eyes of persons, who still hold unto the old ways of earning income through actively involved directly and paid monthly. People who still think that way and only want to depend on that alone for a living would be stressful when they retire.

Times have changed, as I said earlier on this write-up that God has made change permanent yet man refuses to admit this and always clings to things that have been changed by nature. People, who do not like change and hold unto old ways of doing things wake up from their sleep only to realize that it was not night this time round.

Employees work wholeheartedly for organizations expecting good retirement benefits when theirs is due. Some organizations really have very appreciative packages for workers, who retire from active service to them but these benefits would not last if those workers do not have what it takes to keep those packages for the longer purposes for which they were given.

 The way forward for any employee working now and knowing very well that retirement is imminent is to realize that their occupational pension scheme alone would not sustain them happily. What it takes to sustain the happiness after retirement would be to learn to invest. Investing is a game learned over time to get experience and not just because one has money and can invest. People should:

        ·            Take classes in financial literacy to help one become financially aware and financially literate.

        ·            Attend investment classes. Remember, there is no bad investment but there is a bad investor. Would you wait to become that bad investor on retirement?

        ·            Attend practical entrepreneurial seminars, etc.

        ·            Take classes in subjects pertaining to money.

        ·            Read books on money, investments, finance, accounting and economics.

        ·            Listen to investment programmes on radio or CD and or watching TV programmes on investments and financial matters.

        ·            Attend seminars and classes on health issues.

        ·            Learn to be emotionally intelligent so that when your retirement package goes down the drain when you decide to invest it without investment experience and knowledge.

        ·            Attend short courses that educate you on a wide range of issues. Keep learning many new things before you go on retirement.

“Chase your passion, not your pension” (Denis Waitley)

Godwin-Xavier Ayeebo is a Financial Literacy Activist, an Accountant, a Writer and Founder of Financial Literacy Training Institute, (FINALTI

©2014, Godwin-Xavier Ayeebo

Email:  finaltigh@gmail.com

Blog: http://g-xavierayeebo.blogspot.com

FINANCIAL LITERACY FOR ALL-SHARES

Why would you buy or not buy shares of a company without knowing much about its financial performance from its financial statements? There is always information on financial and or non-financial performance of any company that trade shares. You just have to look or ask for them.

Financial information and data on all companies’ financial performance could be easily got from their financial statements. It is advisable to look for a number of financial statements (say, last three years, last five years, last ten years, etc) of companies that one wants to invest in. One does not necessary need to be a finance expert before one cannot understand financial matters. Everybody uses money, so everyone should be prepared to learn to become financially literate without necessarily becoming a financial expert. Financial literacy is not Finance neither is it Accounting. Financial literacy is everything about money that is not really taught in the normal classroom.

There is always so much information on any company that sells shares and where there is no enough financial and or non-financial information, one could always request for them.

Definition of a share:

The investopedia.com defines a share as “a unit of ownership interest in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business's day-to-day operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends”

Types of shares:

Basically, there are two types of shares:

Preference shares or preferred stocks:

“Preference shares are differentiated from ordinary shares or common stocks by the way the dividend is paid. Preference shares dividends are paid based on a precise schedule. The shareholders are promised certain amounts of money on certain dates, and these amounts will be paid before ordinary shares, hence its "preference” status. However, preference shareholders cannot vote on any decisions related to corporate governance, and therefore have no say in any business decisions”

Ordinary shares or common stocks:

Ordinary or common shares as the name denotes, are common and are mostly the shares being traded on the various stock exchanges and or sold to investors from both public and private liability companies.

These types of shares bring along a number of benefits and rewards as well as risks. Ordinary or common shareholders are the same as equity shareholders who have voting rights though some of these common shares might have differential voting rights.

Ordinary shareholders or common stockholders have a share in the company’s profit after all legitimate deductions; including dividends of preference shareholders have been made. A share in a company’s profit is given to the shareholder in the form of dividends and ordinary shareholders get dividends as returns or rewards whenever they are declared by their company. These dividends are normally shared in proportion to the number of shares a shareholder has in the company.

Kinds of equity shares:

Rights Issue/ Rights Shares: “This is the issue of new shares to existing shareholders at a ratio to those shares already held”

Bonus Shares: “These are shares issued by companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years” 

Returns to ordinary shareholders:

Capital Gain: This is a return or a reward to the shareholder when the price of the share increases. For instance, if one bought a share priced $2.00 and now the share price increases to $2.2, then there is an increase in value by two cents. It means one would get more money in return when one decides to sell one’s shares at $2.2 and make some gain. Capital gain is the same as capital appreciation.

Whenever the company’s share price increases, then the value of the share increases or appreciates automatically thereby creating more returns or rewards for the shareholder.

Dividend: This is a return or a reward to the shareholder from the company’s profit after payment of corporate tax by the company.

Holders of ordinary shares get returns or rewards in the form of dividends that is a share in the company’s profit after tax and all other legitimate deductions made. For instance, if a company makes a profit of $20,000.00 after tax, then the directors could decide they would share $10,000.00 to shareholders in the form of dividends. Each shareholder would get a part of this $10, 0000.00 according to the number of share one holds.

Earnings per Share :( EPS) this is an indicator of a company’s profitability and should be calculated to get a fair idea of the company’s profitability relating to share earnings. This would help the prospective investor take an informed investment decision. EPS is a company's net income expressed on a per share basis. Net income for a particular company can be found on its income statement or profit and loss account.  It is important to note that the earnings per share formula  is used for only ordinary shares or common stocks and where there are preference shares or stocks their dividends there  are deducted from the net income before calculation is derived.

Earnings per share= Net Income – (minus) dividend on preference shares/ (divided by) weighted average number of outstanding ordinary shares.

Dividend Per share (dps): This simply dividend the amount of declared by the number of shares. For, instance, you hold 2000 shares and your dividend declared to you is $2,000.00, the dividend per share would be:

 Dividend/number of shares = dividend per share, therefore,

 $2,000.00/2000= $1. 00 as dividend per share.

This calculation could also be done for the total number of shares the company has and the total amount declared as dividend. This would help you as prospective investor to decide whether you want to invest in that company or not after assessing the future returns on your investment in shares in a particular company.

Dividend Cover: This is the number of times a company’s yearly profit can pay its yearly declared dividend. It is calculated as profit after tax minus dividend paid on irredeemable preference shares divided by dividend paid to ordinary shareholders. Dividend Cover =Profit after-dividend paid to irredeemable preference shares/dividend paid to ordinary shareholders.

This would also help a prospective investor get advised by a company’s financial statements whether that company’s has the capacity to pay dividends for a short, medium or long time to come. This is should be done using many years’ of a company’s financial statements as just one year or just few years would not necessarily give a true picture of future performance in terms of dividend payments.

Irredeemable preference shares are shares that would not be necessarily repaid by the company unless the company is winding up. The company might not offer to buy these shares back.

Many financially literate investors prefer to use cash related formulae to profit related formulae in calculating investment returns because cash is king and worthier and wealthier over profit. There many other preferred formulas for calculating dividend to shareholders such as the free cash flow to equity (fcfe) formula and others but the idea here is to create some awareness of how dividend calculations are done and also to encourage you to learn to calculate these figures as you can always pick the needed data from a company published financial statements. Everyone can learn to be financially literate.  These pieces of financial information should help any prospective investor take informed decision.

Tax on Dividend and or Capital Gain:

Dividend and or capital gain are all types of portfolio income and for that matter are taxed in almost every country with various tax rates. In some countries, shareholders prefer to dividends to capital gains and in some countries some prefer capital gains to dividends because of the liability implications. It is advisable to know the tax rates and implications of either one or both in your country of residence, so you would be better informed to take a beneficial portfolio investment decision.

Shares (Equity Funding) as source of finance to companies:

Ordinary shares are issued by a company to people who want to become part owners of that company. Once, you buy some of the shares of a company, until you sell them, you are an automatic part owner of that company. This means you have given the company money in exchange of its shares, so the company has sourced finance from you and all other people who would buy some of the shares.

Entrepreneurs and business owners should aim at expanding their business and giving away some part ownership to investors that want to be part of their businesses. Businesses should therefore be run with the mindset that one day others would be needed to help with their money and ideas and expertise, so entrepreneurs should put into the right structures that would attract investors such as equity shareholders.

Benefits to the company selling ordinary shares or common stocks:

·        Funds could be sourced from many prospective investors from across the globe.

·        Long-term capital the company is not required to pay back in its life time and this could be permanent capital.

·        Shares could be sold publicly to anybody or any institution interested in them or sold privately to private individuals or institutions that are interested in buying them.

·        Dividend payments could be delayed till it is favourable for the company to start paying them out.

·        Dividend is only paid if declared in a particular year, because dividends are declared subject to the availability of profit and cash to pay them out.

·        Dividend amounts do not necessarily have to be increasing or decreasing yearly, they could be constant or increasing at an increasing rate or at a reducing rate. Management therefore has the leisure based on the company’s dividend policy to decide what to do when it comes to issues of dividend.

Companies that have sold their shares to equity shareholders or preparing to shares their shares to prospective investors need to be mindful that people invest because they need returns in the forms of dividends and or capital gains and for that matter management should try to make profits and have cash available to pay out dividends to shareholders or try make add more value to the share price so investors would mostly gain. It is disheartening to have shares of a company that does not pay out dividends and its share pricing is also falling. Inexperienced investors would lose much interest in the stock markets and this affects the general performance of a country’s or even the global stock market as many would or would not be interested in trading in shares.

Disadvantages to the company selling the equity shares:

·        High issue costs, it costs very high to issues shares and the company might end up not meetings its target sales of the shares. The shares could be under subscribed by the public.

·        Issue costs are not tax allowable expenses; most tax jurisdictions do not allow companies to deduct share issue costs from their revenue, so the companies have to bear these huge costs all by themselves.

·        Excessive issue of equity shares to raise funds would end up making the few original shareholders poorer as they would have to share any small profit with many. The share price is likely to be diluted and original shareholders voting powers are diluted and reduced.

·        Majority shareholders, these shareholders have more voting powers and control and could try to manipulate management to take certain decisions that might not be in the interest of other shareholders  and other stakeholders though all shareholders and stakeholders’ interests are also important.

·        Speculations on the stock market, equity shares of good performing companies are hotcakes on the markets and speculations about their values are not good for the company as the price keeps moving up and down.

Benefits to the investor of ordinary shares or common stocks:

·        Both Cash flow and capital gain are possible for the investor, where a company pays out dividend yearly and its share price is also increasing, then the equity shareholders enjoys both cash flow as dividend and capital gain as the share price appreciates.

·        High returns in boom periods of the markets, equity shareholders could get very high returns on their investments compared to others as they are the last to benefit from good performance.

·        Right to participant in the management if the company, equity shareholders have voting rights in electing and removing directors and auditors and some shareholders with needed expertise could even be involved with the daily activities of the company to help it succeed greatly.

·        Shares could be acquired with small capital; anybody interested in being equity needs just small capital to buy the minimum numbers of shares to become a part owner.

Disadvantages to the investor:

·        Loss of everything on liquidation of the company, where the company winds up or liquidates, closes down permanently, equity shareholders lose all their investment, unless the winding up or closing down is profitable after paying all others including preference shareholders. This type of investment has no insurance that is why it is called ordinary share or common stock.

·        Irregular passive income, dividends to be received would not be constant in terms of yearly increment and even some cases there would be no dividends. Decisions on dividends are taken by the board of directors subject to the availability of profits and the intended use of profits by the company.

·        Initial capital could reduce where the share price keeps moving down, the investor losses if he decides to sell and where they decide to hold and pray for an increase in share value, it is still not predictable the price would increase.

·        No control over one’s money, individual small equity shareholders do not have many shares and for that matter do not have much say and cannot control or manipulate management for their interests. Where is no control over one’s money, one cannot really determine where one’s money goes.

Where to trade shares:

Shares of public listed companies are traded on various stock exchanges all over the world. In many countries there are also stock exchanges for small and medium enterprises that do not qualify to be listed on the main exchanges to also raise funds from those markets.

In Ghana, one has recently been set up but its publicity is not there for intended companies to take advantage of its existence.

Here is a good article on Ghana Alternative Market (GAX) from a good friend of mine, Sophia Teye Kafui, an investment banker. It would help educate you a lot on it. (http://skafuiteye.blogspot.com/2013/07/have-you-considered-ghana-alternative.html)

Other countries also have theirs, for instance, in the UK they have the Alternative Investment Market (AIM)

These markets are there for small and medium enterprises to trade their shares to raise the needed funds for expansion and other purposes.

Entrepreneurs everywhere need to know the existence of these markets to try to meet their requirements to be able to take advantage of their services.

The Inside Investor

This is an investor, who starts a business and probably owns all or majority of the shares of that business and mostly they are key part of the management of the company. Therefore, they know everything inside out about the company. This is the original owner of the company and could later sell part of his/her shares to others, while he/she still remains in management of the company.

The Ultimate Investor

This is an investor, who has been able to run his/her successfully and is now selling some of his shares to the public to raise funds for many purposes. The ultimate investor is a selling shareholder and the outside investor buying is a buying shareholder.

Most of the people that buy shares would not be part of the management of the company would be outside shareholders or investors. They would be sleeping in the houses and expecting the ultimate investor to turnaround their money for them to get their dividends. What they need is just a good return on their money and they do not care much about what is going in the boardroom of the company. The ultimate investor takes most decisions, good or bad for the outside investor.

Shareholders and management

In many big businesses, the shareholders are mostly not the same as the board of directors or management running the affairs of the company. Shareholders are the owners of the company while the members of management are mostly employees, who do not necessarily have some shares and for that matter are not part owners of the company. Shareholders have their own interests that should be line with the interests of management but this is not always the case. Shareholders would mostly be looking for long-term success of the company while management wants to succeed in the short-term to be commended and given rewards.

There is always conflict of interest between what shareholders want done and what management wants to do, but the interests of shareholders should be paramount over management interests. Shareholders should always try to monitor management to take decisions that are in the best interest of shareholders and all other stakeholders, including management and employees.

Performance linked to profitability and reward schemes and incentives should not be introduced in such a way that management could manipulate them to satisfy their short-term individualistic aims. 

Patience is needed in every investment and all entrepreneurs and investors should learn to be emotionally intelligent.

Warrant Buffet wrote “The stock market dominates the investment market for a period of twenty years. As the twentieth year approaches, the possibility of a market crash increases. After the crash, the stock market tends to stay down for ten years. During the ten years the stock market is down, commodities such as gold, silver, oil and property dominate the investment world. And every five years, there is some kind of major disaster.”

I believe anybody following investment markets in the world would agree with the richest portfolio income earner, Warren Buffet.

We should not forget that no condition is permanent and so anything instituted by man would not last forever without crumbling down. There would be times investments in all sectors would boom and times that they would crumble down.

Robert Kiyosaki also wrote “Invest for cash flow and you’ll never worry about money. Invest for cash flow, and you will not be wiped out in boom and bust markets. Invest for cash flow and you’ll be a rich man”

Godwin-Xavier Ayeebo is a Financial Literacy Activist, an Accountant, a Writer and Founder of Financial Literacy Training Institute, (FINALTI) incorporated and registered under the laws of Ghana to help educate the Ghanaian and the world populace on Financial Literacy.

©2013, Godwin-Xavier Ayeebo

Email:  finaltigh@gmail.com

Blog: http://g-xavierayeebo.blogspot.com