Here’s what you need to know about partly-paid shares and whether or not you should buy

Yesterday, we looked at preferred shares and now we’re going to look at partly-paid shares. Like preferred shares, these are different to ‘ordinary shares’ and they come with their own set of advantages and disadvantages for investors to consider.

Recap of ordinary and preferred shares

Before we look at partly-paid shares, we think it’s necessary to recap ordinary shares and preferred shares.

Ordinary shares are self-explanatory. They represent ownership in a company, but they do not come with special or preferred rights. They may or may not be ‘dual class’ in that some may have special voting rights. The ASX does not allow dual class shares right now, but other exchanges do, and we think it is a question of when and not if in light of the ASIC inquiry that’s been going on this year into how to revive the ASX. When the ASX itself said in its submission that it’d be open to considering it, surely that was a telling sign if ever there was one. But we digress from that debate.

Owners of preference shares have ownership in their company, but they have priority or preference over ordinary shareholders in respect of dividend payments and any payouts given to investors if the company goes bust and assets are distributed. They usually are behind bond holders in the queue but are ahead of ordinary shareholders.

What are partly paid shares?

Partly-paid shares, sometimes known as contributing shares, are shares in a company for which the full price has not yet been paid. When a company issues partly-paid shares, the investor (or shareholder) pays only a portion of the total share price at the time of purchase, for instance 50-75%, and the rest is due later.

When exactly? That’s up to the the company. A company can request (or “call”) the remaining balance at a later date. The timing and amount of these calls depend on the terms set by the company. These calls can be made over time and may vary in frequency.

Partly-paid shares may be seen as riskier because investors may not know exactly when or if the remaining payments will be called. On the flip side, they could be more affordable upfront than fully paid shares.

It is important to note even though the investor hasn’t fully paid for the shares, they usually still have rights to dividends and voting rights, based on the amount they’ve paid for the shares. However, if they fail to pay the remaining amount, they could lose their rights or even their shares. What exactly happens will be up to the company and the specific terms around those specific shares.

Why would companies issue partly-paid Shares?

Companies may issue partly-paid shares to raise capital without requiring immediate full payment from investors. This helps attract investors who might not have the full funds available but still want to be part of the company’s growth.

How to buy partly-paid shares?

Same as any other shares, through a broker. How can you tell them apart from ordinary shares? Well, usually they’ll have 5-letter tickers rather than 3, same as preferred shares. Another way to tell is that in Australia, you will be required to formally agree and acknowledge that you understand the risks involved. So you need to be careful because you cannot plead ignorance.

Conclusion

In summary, partly-paid shares provide a way for companies to raise funds while allowing investors to pay for their shares in instalments.

However, investors need to be aware of the risks involved, especially if the company issues calls for additional payments that they might not be able to meet.

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