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What
are Shares?
When you buy shares in a
company, you are buying a share of the ownership in the
underlying company, complete with the right to a share
in the firm's future earnings. The more shares you buy,
the more of the company you own.
So why does a company
issue shares? Well, usually a company will issue shares
when it needs to raise capital (money) for expansion,
research and development, for its general operations or
to pay off debt. The company could also use other
options such as getting a loan from a bank or issuing
bonds or debentures. One of the advantages of issuing
shares is that shares raise capital without debt and
without a legal obligation to repay the funds, unlike
bank loans or bonds, which are direct debt obligations
of the issuing corporation,
The first time a company
sells stock to the public it is known as a Public Float
or Offering, or sometimes referred to as 'going public'.
There are thousands of publicly listed companies you can
purchase shares in, from a diverse range of sectors.
There are also different
types of shares.
1.
Ordinary shares
The most common type of
shares is known as ordinary shares. Purchasing ordinary
shares gives the owner a stake in the company and an
entitlement to dividends. Dividends are the part of the
company's profits that are paid out to the shareholders
every six months when the company is making a profit.
Most ordinary shares also give the shareholder a right
to attend the company’s annual general meeting and
vote on issues relevant to the company’s future.
2. Preference shares
Preference shares return
a fixed dividend to the investor that is not linked to
the company's annual profit result. Although preference
shareholders receive dividends before ordinary
shareholders, they do not receive the same voting rights
as ordinary shareholders.
3. Contributing shares
Contributing shares are
those that have not been fully paid for and require
further payment in the future. Dividends are generally
paid according to the proportion of the paid-up amount.
4. Bonus issues
A bonus issue is a free
issue of new shares to existing shareholders. Every now
and then when a company makes an extraordinary profit,
or if it has amassed accumulated profits over a period
of time, it gives its shareholders a present of a bonus
issue of shares at no cost. Receiving a bonus issue does
not increase the proportion of a company owned by the
shareholder, as all shareholders receive the same
present in proportion to their ownership of the company.
It is, in effect, a cashless dividend.
5. Rights Issues
A rights issue is also
an issue of new shares to existing shareholders.
However, these are not free. A rights issue occurs when
a company needs to raise extra capital and it gives its
shareholders a right, but not an obligation to purchase
extra shares. There are two types of rights issues,
renounce able and non-renounce able rights. Renounce
able rights can be traded on the share market if an
existing shareholder does not wish to purchase the new
shares being offered to them. They are therefore of some
value to the shareholder - a little bonus. Non-renounce
able rights cannot be traded or sold to others, so if
the shareholder does not take up their right to buy the
new shares by a particular date, the rights are of no
value to them.
So those are the five main types of shares. In general,
when we refer to shares in this book and training
modules, we are talking about ordinary shares.
Next:
Why Share Prices go Up and Down
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