Shareholders and Shares

Question 1

What is a shareholder?

Answer 1

A person who has invested money into a company (an incorporated business) in exchange for a share of the ownership.

Question 2

What is share capital?

Answer 2

refers to the amount of money the owners of a company have invested in the business as represented by common and/or preferred shares.
also refers to the funds a company generates by selling shares to investors.

Question 3

What are the benefits of being a shareholder?

Answer 3

• purchasing a share gives the buyer partial ownership of the company.
• shareholders may be entitled to a portion of the company’s profits, called dividends.

Question 4

How do shareholders benefit the business?

Answer 4

the proceeds from the sales of shares are used to support the company’s operations, expansion, or investments.

Question 5

What is ordinary share capital?

Answer 5

• money given to the company by shareholders in return for a share certificate that gives them part ownership of the company.
• ordinary share capital is permanent, so a business will never be required to repay the value of these shares to their owners.

Question 6

What are the features of ordinary shares?

Answer 6

• equal voting rights based on number of shares held.
• shareholding % represented by the number of shares held compared with the total number of shares issued.
• qualify for a dividend if one is paid.

Question 7

How is share price influenced?

Answer 7

By supply and demand. If demand is high, then price is high. If excessive numbers of people are selling shares, then the price is low.

Question 8

How does public trading differ between private and public limited companies?

Answer 8

• private: between friends and family, not public.
• public: traded on stock exchange, public.

Question 9

How does share price determination differ between private and public limited companies?

Answer 9

• private: decided between buyers and sellers.
• public: determined by supply and demand.

Question 10

How does valuation basis differ between private and public limited companies?

Answer 10

• private: considers factors like financial performance.
• public: influenced by market conditions.

Question 11

How does price stability differ between private and public limited companies?

Answer 11

• private: less frequent trades so more stability.
• public: share prices are volatile and can change rapidly.

Question 12

How does regulation and transparency differ between private and public limited companies?

Answer 12

• private: less regulation and lower transparency.
• public: more regulation and higher transparency.

Question 13

What are two ways in which shareholders can receive their rewards?

Answer 13

Dividends or Capital Growth/Gain

Question 14

What are dividends as a reward for shareholders?

Answer 14

Payments made to shareholders by the company from earned profits.
Amount paid is per share.
There is normally no requirement to pay dividends but most quoted companies do.

Question 15

What is capital growth as a reward for shareholders?

Answer 15

Arises from an increase in the value of the business, and reflected in an increase in share price.
No guarantee that a shareholding will increase in value.

Question 16

What is market capitalisation?

Answer 16

the value of the company that is traded on the stock market.

Question 17

How is market capitalisation?

Answer 17

share price x number of shares sold

Question 18

Internal factors that influence a PLC’s share price

Answer 18

• financial performance
• dividend policy
• management reputation

Question 19

External factors that influence a PLC’s share price

Answer 19

• state of the economy
• general market sentiment
• whether the company is a takeover target

Question 20

What are profit warnings?

Answer 20

Unexpected warnings indicating that market expectations will not be met, that almost always result in a significant fall in share price.

Question 21

What are the impacts of profit warnings?

Answer 21

• lower investor confidence can lead to the sell-off of shares.
• investors therefore reassess the companies value and because of this the share price drops.
• indicator for future performance, can lead to scrutiny for management and processes.

Question 22

Summary of share capital as a source of finance

Answer 22

• known as equity finance.
• returns: dividends and capital growth.
• part of the ownership of the company.
• long term source of finance.
• returns tend to be higher given higher risk.
• can be repaid but unusual.

Question 23

Summary of debt as a source of finance

Answer 23

• most commonly in the form of loans or overdrafts.
• returns: interest on amount loaned or outstanding.
• repaid over an agreed period.
• can be short or long term.
• no participation in the ownership of the company.
• often secured against the assets of the company.

Question 24

What is the cash flow when issuing shares?

Answer 24

1.) company issues new shares.
2.) shareholders buy new shares.
3.) company has: more cash, more shareholders.

Question 25

What are the benefits of share issues?

Answer 25

• able to raise substantial funds if the business has good prospects.
• equity rather than debt = lower risk finance structure.

Question 26

What are the drawbacks of share issues?

Answer 26

• can be costly and time consuming (particularly flotations)
• existing shareholders holdings may be diluted.

Question 27

What is the role of shareholders?

Answer 27

• financial support
• controls
• receive dividends
• capital gain

Question 28

What are the functions of shareholders?

Answer 28

• provide finance for a business.
• influence decisions (majority shareholder).
• vote on resolutions at annual general meetings.
• have the right to inspect accounts.
• have the right to dividends and a share of proceeds if the company is liquidated.

Question 29

What are the effects of ownership on mission, objectives, decisions, and performance?

Answer 29

• sole trader, partnership, ltd companies - owners have a large role in management and leadership.
• ownership balance can change quickly as these businesses grow.
• in PLCs, vast majority shareholders are not involved in management or leadership.