Shareholding

Question 1

What are shareholders

Answer 1

The owners of limited companies and can be individuals, companies or institutions

• in ltd’s this needs to be friends,family or acquaintances of the founder and there can be 2-50
• in plc’s anyone can buy shares

Question 2

Features of shareholders in ltd’s

Answer 2

• all shareholders must agree on a potential purchase of shares
• they aren’t publicly traded

Question 3

Features of shareholders in plc’s

Answer 3

• anyone can buy shares in an existing plc
• they are freely traded on stock exchange
• usually require a stockbroker who will act as an intermediary in the transition

Question 4

How do shareholders influence a business?

Answer 4

• provide finance for a business, founders give up ownership to fund expansion and development
• vote on key decisions that effect the running of the business, the value of the vote is equal to level of ownership
• can access all company info, books and records

Question 5

What is ordinary share capital?

Answer 5

• the company only raises money when shares are sold for the first time
• this money is ordinary share capital
• never has to pay this money back
• if the shareholder wants it back they must sell shares to another investor
• company makes no money when shareholders sell their shares

Number of shares sold X price they were sold for

Question 6

Why become a shareholder?

Answer 6

• to be involved in the running of a business
• to try take control of a business (50.01%)
• to make money (capital gain) selling shares got higher prices than what they were bought for.
• earn money through a dividend payment

Question 7

What are dividends?

Answer 7

• a share in the company indicates ownership of a company
• as an owner, you are entitled to a share in the profits of the company
• not all profit is paid out, some is retained
• from what is given out, a shareholder is paid a proportion

Question 8

What are share prices based on and how do they effect a business?

Answer 8

• shares are firstly sold through an initial public offering (IPO) in the primary market
• price is set based on size and value of company
• once bought they are then traded on stock exchange (secondary market)
• price is now determined by how many shares are available to be bought and how much demand there is for them

Question 9

How do share prices change?

Answer 9

• state of the economy, if it’s doing well investors are more likely to spend on shares and prices will rise
• performance of the company, if it’s doing well investors will wish to buy shares to benefit from dividends
• proposed takeovers, if its thought another company wishes to buy out and/ or takeover the company it will affect the price of the shares
• expectations, if investors like the company idea they will sell shares

Question 10

Why do companies care about share prices?

Answer 10

• low share price makes it easier to be bought out
• shareholders are owners, if price falls because of performance they’ll want to change things (employees)
• managers and employees may be given shares as an incentive
• higher the market cap, easier it is to borrow money

Question 11

What is market capitalisation?

Answer 11

• calculates the value of a plc
• current share price X number of shares issued
• used to judge the size of a company and value
• large cap = >4bn value, medium cap = 500m-4bn, small cap = <500m

Question 12

What are the features of the different sized “cap” companies?

Answer 12

Large cap companies - have less volatile share price and more likely to pay dividends

Medium cap companies - better growth prospects, frequently targeted for mergers with larger companies and also more volatile than large companies

Small cap companies - likely to be long term investment, slow and steady