Keys to understanding the difference between participation and stock before investing

When we delve into the world of investments, we encounter a common dilemma: participation or shares? Although at first glance they may seem like similar products, the difference between participation and shares is substantial and can significantly influence our investment strategy. Understanding these distinctions is essential for making informed decisions and avoiding unpleasant surprises in our portfolio.

Shares: the gateway to business ownership

Let’s start with the basics. A share represents a portion of a company’s share capital, granting the holder the status of owner of that company in the corresponding proportion. When we acquire shares, we become shareholders, participating directly in the company’s destiny.

Being a shareholder implies benefiting from a series of fundamental rights. The first is the right to receive dividends when the company decides to distribute its profits. Additionally, we have the right to information about the company’s financial and operational situation, as well as the right to attend and vote at General Shareholders’ Meetings, where the most strategic decisions are made.

Other rights include preemptive subscription when capital is increased, and participation in liquidation proceeds in case of company dissolution. This set of rights is what truly differentiates us as active owners of the organization.

Participations: the lesser-known alternative

Participations also represent parts of the company’s capital, but their nature is different. The main difference between participation and shares lies in the fact that participations can be issued by any type of company, whereas shares are only issued by Corporations.

With participations, we obtain the right to receive dividends, but that’s where the similarity ends. Unlike shareholders, participants do not have voting rights or the right to attend board meetings. Additionally, participations have a predetermined duration; they are not indefinite. The participant adopts more of a creditor position than that of an owner.

A defining feature is liquidity: participations are not traded on organized markets or stock exchanges. Their buying and selling occur exclusively in the private sphere, requiring direct contact between the parties. The price is not determined by market supply and demand but follows the current valuation of the company and its income projections.

The critical aspect: how they are traded

The difference between participation and shares becomes more evident in the mechanisms of buying and selling. Shares, if listed on the stock exchange, are traded efficiently through regulated national and international markets. We do not need to know the counterparty; intermediaries (brokers, financial institutions) facilitate the transaction.

Participations, on the other hand, require direct private negotiation. This entails less agility, greater difficulty in finding a buyer or seller, and less transparent prices. Reduced liquidity is a significant barrier for those seeking mobility in their investments.

Shareholder versus Participant: different roles

These terms denote fundamentally different positions. The shareholder is an owner, with decision-making power over the company. The participant is more of a creditor, with limited rights to receive payments for a set period.

This difference has implications when the company faces difficulties. In case of bankruptcy, there is a priority order that determines who gets paid first. Secured creditors are paid before, and shareholders are always last. Participants, occupying an intermediate position according to their debt classification, are often better positioned than shareholders in this insolvency scenario.

Comparative table: difference between participation and share at a glance

Participations in investment funds: a special case

There is an important subcategory where the term “participation” takes on a different meaning. Investment funds operate by pooling capital from multiple investors (at least 100 according to Spanish legislation, with a minimum of 3 million euros). These funds are divided into participations distributed among contributors.

The fund invests in bonds and shares following its investment policy, while a Management Company oversees decision-making and a Depositary Company safekeeps the securities. Fund participants receive dividends based on the generated profitability but do not participate in investment decisions. The difference between fund participation and corporate shares is clear: one is an indirect managed investment, the other is direct ownership.

CFD on shares: the modern trader’s alternative

A common confusion arises when comparing shares with CFDs on shares. CFDs are financial derivatives whose price exactly replicates that of the underlying asset. Trading CFDs on shares provides price movement and dividends identical to shares but without voting rights or access to meetings.

The advantage of CFDs lies in lower costs, greater operational agility, adaptability to different budgets, and the ability to operate short. For traders focused on profitability through revaluation and dividends, these derivatives offer superior efficiency compared to direct share purchase.

Types of shares: beyond the ordinary

Within shares, there are important categories. Ordinary shares are the standard: parts of capital with rights to dividends, voting, and participation in liquidation. Preferred shares grant priority in dividend payments but lack voting rights. Non-voting shares function like ordinary shares but without voting capacity. Redeemable shares include buyback agreements with a predetermined maturity.

How a company goes public

When a company decides to go public, it chooses among three paths. The Public Offering (OPV) puts existing shares up for sale without issuing new ones. The Public Subscription (OPS) involves issuing new shares. Listing simply registers the company on the stock exchange without immediate capital transactions.

Underlying similarities

Despite their differences, participations and shares share characteristics. Both are fractional parts of share capital, divisible only in the minimum established amount. Both can be accumulated in the same portfolio, originating from one or multiple companies. Both must always be assigned to a defined holder, individual or legal entity.

Deciding between participation and share: a practical guide

For the individual investor, the difference between participation and share often results in a clear choice. If seeking liquidity, price transparency, and operational ease, listed shares are the option. If the goal is long-term investment in private companies with direct relationships with managers, participations may be appropriate.

For those operating on trading platforms, the reality is that they typically find shares and CFDs on shares, not participations. CFDs offer profitability without the complexities of share ownership but without associated rights. The choice depends on risk profile, time horizon, and specific performance objectives.

Understanding this clear difference between participation and shares helps avoid hasty decisions and aligns investments with our actual decision-making capacities in the companies where we invest capital.