9.2 Equity or ordinary shares

Question 1

What is meant by “authorised share capital”?

Answer 1

The maximum amount of share capital that a company may issues as detialed in the memorandum of association.

Question 2

What is “nominal share value”?

Answer 2

The book or face value of each share (e.g. 1p)

Question 3

What is the “market price” of shares?

Answer 3

The price at which shares are sold.

Question 4

What are the advantages of equity shares?

Answer 4

• shareholders are paid the residual funds (as dividends) and leftover funds in the event of liquidation
• shares can be easily traded in the stock market
• issuing shares can promote the company in a positive light

Question 5

What are the disadvantage of equity shares?

Answer 5

• Shareholders can use their voting right to control the company
• additional share issues will dilute voting rights and dividend values

Question 6

What is the most difficult aspect of issuing shares for a company?

Answer 6

Setting the price correctly (not too high or low)

- too high and there will be little interest

Question 7

How does a rights issue bypass the issue of setting the price of shares?

Answer 7

Rights issues to existing shareholders are usually offered at an attractive price.

Question 8

What is a “public issue” of shares?

Answer 8

Shares are offered to the general public by inviting them to apply at a fixed price, as set out in a prospectus.

Question 9

What is a “placing” of shares?

Answer 9

Shares are offered directly to third party investors

Question 10

What is a “rights issue” of shares?

Answer 10

Existing shareholders are offered shares in proportion to their existing holding.

Question 11

What is a “bonus share” or “Scrip issue” of shares?

Answer 11

Additional free shares given to the current shareholders based on their existing number of shares.