Share certificates refer to securities issued by companies as evidence of ownership. When considering whether share certificates are a good investment, there are several key factors to analyze. First, share certificates carry ownership rights that can provide dividend income. However, the return depends greatly on the financial performance and dividend policy of the issuing company. Second, share certificates have capital appreciation potential depending on the growth prospects of the company. Fast growing and innovative companies generally have greater upside. Lastly, share certificates carry risks from both business operations and market volatility. Diversification across companies, sectors and asset classes is important for risk management.
Ownership rights and dividend income potential
Share certificates represent ownership interest in a company. Owners or shareholders have claims on assets and earnings, which may be distributed as dividends. Strong, stable companies with a shareholder-friendly dividend policy can provide stable dividend income. However, dividend payments are discretionary and determined by the board of directors based on business conditions and capital needs. The level and growth rate of dividends over time is a key driver of total returns.
Capital appreciation driven by fundamental growth
In addition to dividends, share prices can increase reflecting fundamental growth in the business and future profit potential. Innovative companies that rapidly gain market share can experience dramatic price appreciation over time. However, competitive dynamics and disruption risk needs to be assessed. High growth alone does not guarantee shareholder value creation.
Volatility from business cycles and investor sentiment
Share prices fluctuate with business cycles, consumer demand and investor sentiment. During economic downturns or industry disruptions, revenues and margins can contract significantly resulting in falling profits and share prices. Technical factors like momentum, flows and algorithmic trading can also amplify volatility in the short term. Hence portfolio diversification and gradual buying on dips is prudent.
Due diligence requirements on governance and transparency
For minority shareholders, business transparency and governance standards are crucial. Financial reporting quality, disclosures, executive compensation structures and accountability to stakeholders determine alignment with shareholder interests. Complex holding structures and dual class shares can enable insider control dilution of external shareholders. Regulatory oversight and shareholder activism play a role especially for widely held corporations.
In summary, share certificates can generate returns from both dividends and capital gains but also carry risks from business cycles and volatility. Careful analysis of industry dynamics, competitive position, growth trajectory, financial health, governance standards and valuation is required to determine expected risk-adjusted returns.