Enhancing your financial literacy with CSE Education Academy Navigating corporate actions, risk and return and mindset of wise investors

By Colombo Stock Exchange 

In this instalment, we explore the added benefits of being a shareholder, balance between risk and return in investments and insights that guide wise investors toward making informed decisions.

Additional benefits for shareholders

As a shareholder, you not only have ownership in the company but also gain access to several benefits that can enhance your investment.

Rights issues: A rights issue allows the existing shareholders to purchase additional shares at a discounted rate from the market price. This opportunity enables the shareholders to increase their ownership at a lower cost. For instance, in a two-for-10 rights issue, the shareholders can buy two new shares for every 10 they own. Participating in the issue can be advantageous due to the discount, potentially leading to capital gains. Those who choose not to participate can sell their rights in the market, avoiding dilution.

Sub-division of shares (share splits): A share split increases the number of shares a shareholder holds without changing the total investment value, making each share more affordable and enhancing market liquidity. For instance, in a one-for-two split, a shareholder with 100 shares receives an additional 100 shares, while the price per share is halved, increasing accessibility for investors. Although the overall value remains unchanged, a share split can attract more investors and boost market activity.

Capitalisation of reserves: Capitalisation of reserves, previously referred to as bonus issues, takes place when a company converts the retained earnings into capital by issuing new shares to the existing shareholders. This increases their share count without requiring payment. For example, in a one-for-five capitalisation, the shareholders with 100 shares receive 20 additional shares, boosting confidence and signalling solid financial health, which enhances long-term investment value.

Risk and return

Every investment carries a balance of risk and return and wise investors carefully assess both before making decisions. While corporate actions like rights issues and share splits offer attractive benefits, they come with risks that must be weighed. For example, a company offering a rights issue may be raising capital due to financial stress and an investor must evaluate whether the potential for capital gains outweighs the risk. Successful investing requires managing risk in pursuit of returns and understanding corporate actions is an important part of that process.

Wise investors

Wise investors start by clearly defining their financial goals and understanding their capital growth potential. They invest only what they can afford to set aside long term, minimising unnecessary transaction fees. Knowledge of available investment products is crucial and seeking professional advice is recommended for clarity on investment instruments. Additionally, wise investors assess their risk tolerance, choosing strategies that align with their financial objectives and comfort levels regarding risk.

Understanding these corporate actions and their benefits equips you with more tools to make strategic investment decisions. Join us next week to explore more topics in the capital market.