Date Posted: 1/14/2013 12:21:06 AM
Posted By: moff J Membership Level: Silver Total Points: 485
Shares are units of ownership offered by a company to the public to enable the public obtain a piece of ownership in the company. The shareholders of a company are the legal owners of the company. These shares maybe trading publicly in a stock exchange market, like the Nairobi Stock Exchange, or maybe privately held by individuals and institutions. On the other hand government securities are instruments issued by the government of a certain country for various purposes among them, curbing inflation through open market operations, and to provide budgetary support to the government. A country like Kenya had a Sh. 1.3 Trillion budget for the financial year 2012/2013 yet the revenue collections are projected to be around Sh. 800 billion. This deficit is to be filled through domestic or external borrowing. It is through domestic borrowing that the government securities come across. The instruments that the government issue include treasury bills and government bonds. We are now going to put into perspective the company’s shares and the government securities even as we try to demystify which between the two kinds of investment opportunities is more appropriate.Shares as we mentioned earlier are traded in the stock exchange. When forming your investment portfolio, you have to understand that investment in shares is very risky and it requires a lot of patience. This is because the prices that the shares trade in are highly unpredictable and they are dependent on a number of factors. As a matter of fact, one cannot accurately forecast the price of a particular share. Many theories have been developed to explain the movement of share prices but none of them has been conclusive as they tend to contradict each other on a number of issues. Thus, it all depends on the attitude of the investor in deciding on which theory to adopt.The returns of investing in shares include dividends and capital gains. Dividends are paid by the company to its shareholders as a form of return on their investment. Capital gains on the other hand are created by the investor him/herself. They arise where the shares are sold at a price higher than the price at which they were bought. For instance, let us say you have a share of a company at a price of Sh. 10. Six months later, the share is trading at Sh. 18 and you decide to sell it. This means that you make a profit of Sh. 8 which is referred to as the capital gain.The con of trading in shares is the uncertainty surrounding the price. There may be times when the price of the share may plunge and thus the investor ends up making huge losses. Nevertheless, if the price shoots up then you stand to rake in enormous profits. Hence, I guess it is true what they that the higher the risk, the higher the returns.Government securities on the other hand are considered to be less risky or actually riskless investment. This is because the government is very unlikely to default on payment of interest on the security and settling the debt upon maturity. One of the government securities is the treasury bills. These are short term instruments which mature within a short period such as three months. Their interest rate is usually determined by the prevailing market interest rate. As such, they are an appropriate investment tool for the investors who want to earn some interest on their money within a short period of time. The investor tends to benefit if the interest rate is higher than the inflation because in such circumstances there will not be loss in purchasing power of the money. The deterrent in this kind of investment is that there is a minimum amount which one can be able to invest. This amount is normally quite high and thus many retail investors are unable to participate in it. Another form of government security is the government bonds. These are long term tools intended to raise huge chunks of money. The rate is determined by the prevailing market rate and the demand for the bond. The maturity period for the bond could be as long as even 30 years. The good thing about bonds is that they are traded in the securities exchange unlike the treasury bills. As such, one can be able to extinguish his bond by selling it to another investor. Despite the long maturity periods, government bonds give a high return and the investor is assured of recouping his/her capital outlay.In conclusion, it is important to point out that investment in shares is much riskier than government securities and is therefore suitable for those investors who have a risk taking attitude. They can give you a high return on investment but at the same time can result into huge losses. Treasury bills and government bonds are less risky and are suitable for risk averse investors. All in all, an optimum investment portfolio is likely to be the one that is composed of both riskless securities and other securities.
Next: Does your organization promote a healthy culture?Previous: How to make a personal budget and manage finances wisely
Get premium membership