Definition of a Share
A share is a unit of ownership in a company, representing a proportionate stake in the corporation’s capital. It entitles the holder to a share of the company’s profits, either through dividends or the appreciation of the share price, and typically grants voting rights in company decisions, depending on the class of share.
Companies can be “limited by shares,” meaning that shareholders’ responsibilities for the company’s liabilities are limited to the capital they have invested in the shares. This structure is crucial as it protects investors, capping their losses to the amount they have paid for their shares.
Classes of Shares
Shares take on different forms, each carrying specific rights and benefits:
Ordinary Shares
Ordinary shares empower holders with voting rights and dividend payouts. However, dividends are not guaranteed and depend on the company’s profitability and board decisions.
Preference Shares
Holders of preference shares enjoy dividends before ordinary shareholders and may have priority over ordinary shareholders concerning asset distribution upon company liquidation. However, they typically lack voting rights.
Special Classes of Shares
- Cumulative Preference Shares: Accrue dividends, ensuring missed payments are compensated.
- Deferred Ordinary Shares: Generally favored in capital-intensive startups, these shares delay dividends to prioritize financial growth.
- Founder’s Shares: Typically held by company founders, offering voting rights but might include restrictions or enhanced benefits.
- Fully Paid Shares & Partly Paid Shares: These denote the payment status by shareholders—fully paid shares have no due balances, whereas partly paid shares require additional payments.
- Redeemable Shares: These can be reacquired by the issuing company under predetermined conditions.
Market Differences
Public companies list their shares on exchanges, facilitating easy buying and selling. In contrast, private company shares often face sale restrictions, like first-right refusals for existing shareholders or the need for directorial approval for transfers.
Related Terms
- Dividend: A payment made by a company to its shareholders, usually as a distribution of profits.
- Voting Shares: Shares that grant the shareholder voting rights in company decisions.
- Shares Outstanding: Total shares currently owned by all shareholders, including share blocks held by institutional investors and restricted shares owned by company officers.
Recommended Reading
For those intrigued by the roles and intricacies of different share classes, consider delving into:
- “The Interpretation of Financial Strategies” by Michael Clearwater
- “Corporate Finance: Principles and Practice” by Stephen A. Ross
- “Equity Markets and Portfolio Analysis” by R. Stafford Johnson
Shares are indeed not just a piece of paper but a gateway to potential wealth and influence within a company—handle with optimistic caution and strategic foresight!
