Shareholders and Shares Flashcards
What is a shareholder?
A person who has invested money into a company (an incorporated business) in exchange for a share of the ownership.
What is share capital?
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.
What are the benefits of being a shareholder?
- 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.
How do shareholders benefit the business?
the proceeds from the sales of shares are used to support the company’s operations, expansion, or investments.
What is ordinary share capital?
- 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.
What are the features of ordinary shares?
- 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.
How is share price influenced?
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.
How does public trading differ between private and public limited companies?
- private: between friends and family, not public.
- public: traded on stock exchange, public.
How does share price determination differ between private and public limited companies?
- private: decided between buyers and sellers.
- public: determined by supply and demand.
How does valuation basis differ between private and public limited companies?
- private: considers factors like financial performance.
- public: influenced by market conditions.
How does price stability differ between private and public limited companies?
- private: less frequent trades so more stability.
- public: share prices are volatile and can change rapidly.
How does regulation and transparency differ between private and public limited companies?
- private: less regulation and lower transparency.
- public: more regulation and higher transparency.
What are two ways in which shareholders can receive their rewards?
Dividends or Capital Growth/Gain
What are dividends as a reward for shareholders?
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.
What is capital growth as a reward for shareholders?
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.
What is market capitalisation?
the value of the company that is traded on the stock market.
How is market capitalisation?
share price x number of shares sold
Internal factors that influence a PLC’s share price
- financial performance
- dividend policy
- management reputation
External factors that influence a PLC’s share price
- state of the economy
- general market sentiment
- whether the company is a takeover target
What are profit warnings?
Unexpected warnings indicating that market expectations will not be met, that almost always result in a significant fall in share price.
What are the impacts of profit warnings?
- 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.
Summary of share capital as a source of finance
- 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.
Summary of debt as a source of finance
- 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.
What is the cash flow when issuing shares?
1.) company issues new shares.
2.) shareholders buy new shares.
3.) company has: more cash, more shareholders.
