Business

Investing in a business is not just for the rich

SSL In The Money

with ANDRÉ EDWARDS

Wednesday, June 04, 2014    

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INVESTMENT has long been perceived as "rich people tings" by many Jamaicans that I have had the privilege to interact with. They are of the view that it's designed for individuals with extensive financial wealth and knowledge. This is a misconception that I hope to dispel, as many investors started with little investment knowledge or funds to invest. There is truly a fundamental need to understand basic business principles. In this report I will start by explaining the basic types of businesses that operate here in Jamaica: Sole Trader, Partnerships, and Limited Company.

As a Sole Trader the business is run by one individual for his or her own benefit and is the simplest form of business organisation. This is advantageous because this type of business is inexpensive to own and organise, decisions can be made quickly, and close contact can be kept with customers and employees. All profits go to the sole trader and the business is easy to dissolve if desired. However, there are some disadvantages such as an unlimited liability, which holds the owner legally responsible for all debts incurred by the business. Therefore if the sole trader is unable to pay these debts, he or she can lose personal property.

A general Partnership is an agreement (usually contractually) between two or more individuals with a common view to make a profit. Each partner will contribute personally to the business and will have unlimited liabilities for debts in the business. As an advantage of this type of business, the pooling of skills and experience become an asset and ultimately the partners decide how the business is run. As usual there are drawbacks, as partners are jointly and individually liable for the actions of the other partners. Profits must be shared since decisions are shared, and with this type of business, disagreements may occur when decisions are to be made. Finally the partnership may have a limited life, that is, it may end upon the withdrawal or death of a partner.

Finally, a Limited Company is owned by shareholders who appoint directors to give direction to the business. The chief executive is the senior official within the company with responsibility for making major decisions. Specialist managers will be appointed to run the company on behalf of the Board. A company is a legal body in its own right with an existence that is separate in law from its owners. Shareholders put funds into this type of company by buying shares (purchased through initial public offering (IPO) on the Jamaica Stock Exchange (JSE)).

Limited liability is a form of business protection for company shareholders and some limited partners. For these individuals the maximum sum they can lose from a business venture to which they have contributed is the sum of money that they have invested in the company -- this is the limit of their liability.

Limited Companies are only liable for the amount outstanding on shares or guarantee, if the members die, this is advantageous so the company can keep going and may be easier to expand. On the other hand, ownership can be easily transferred and can be an administrative burden and subject to government regulations.

I mentioned initial public offering (IPO); let's take a further look at how this relates to investment. Stock market launch is a type of public offering where shares of stock in a company are sold to the general public on a securities exchange such as the Jamaica Stock exchange for the first time. Through this process, a private company transforms into a public company. Initial public offerings are used by companies to raise expansion capital to possibly monetise the investments of early private investors and to become publicly traded enterprises. It is to be noted that a company selling shares is never required to repay the capital to its public investors. After the IPO, when shares trade freely in the open market, money passes between public investors. Although an IPO offers many advantages, there are also significant disadvantages, chief among these are the costs associated with the process and the requirement to disclose certain information that could prove helpful to competitors, or create difficulties with vendors.

Details of the proposed offering are disclosed to potential purchasers in the form of a lengthy document known as a prospectus. Most companies undertake an IPO with the assistance of an investment banking firm acting in the capacity of an underwriter.

Understanding the types of business operating in your market area is important for investors among other basic principles. Another important aspect is creating a valuable relationship with a qualified investment advisor to guide investment decisions; we will explore this aspect in our next issue.

André Edwards is a financial planner at Stocks & Securities Ltd. Contact: aedwards@sslinvest.com

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