Shares

Definition

A share is one of a number of units of ownership interest in a corporation or financial asset. In a corporation, a share means a unit of account for various investments. It entitles its holder to a proportion of the corporation’s profits, often by the way of dividends, and confers certain rights, such as voting rights at shareholder meetings.

Companies are typically limited by shares, allowing shareholders to limit their liability for the company’s debts to the amount they have paid or owe for the shares.

Types of Shares

Ordinary Shares

These shares do not guarantee dividends but usually carry voting rights in the company’s general meetings.

Preference Shares

These shares get preference over ordinary shares in the payment of dividends and in asset distribution upon company liquidation. However, they often do not carry voting rights.

Examples

Example 1: Public Company Shares

Shares of a public company like Apple Inc. can be freely traded on stock exchanges like NASDAQ. An investor purchasing such shares gains partial ownership of the company and rights to dividends declared by the company, subject to certain conditions.

Example 2: Private Company Shares

Shares in a private company, such as a small family-owned business, might carry restrictions on their sale. These shares often need to be offered first to existing shareholders or require the approval of the company’s board of directors before they can be sold to others.

Frequently Asked Questions (FAQs)

What rights do shareholders have?

Shareholders typically have the right to receive dividends, vote on important corporate matters, inspect the company’s books and records, and lay claim on assets during liquidation after debts have been paid.

How do ordinary shares differ from preference shares?

Ordinary shares typically carry voting rights but do not guarantee dividends. Preference shares usually have a fixed dividend and have priority over ordinary shares in the event of liquidation but generally do not have voting rights.

Can private company shares be sold on the open market?

No, private company shares are usually subject to sale restrictions. They often must be offered to existing shareholders first or require board approval before being sold to others.

What is the liability of shareholders in the event of company bankruptcy?

The liability of shareholders is usually limited to the amount they have invested in the company’s shares or the amount they owe on the shares.

How are shares traded in public companies?

In public companies, shares are traded on stock exchanges where they can be bought and sold freely, influencing the company’s market capitalization based on supply and demand.

Ordinary Shares: Shares that confer voting rights but no guaranteed dividend.
Preference Shares: Shares entitled to prioritize dividend payments and asset distribution upon liquidation but lacking voting rights.
Cumulative Preference Shares: Preference shares that retain unpaid dividends to be paid out in future years.
Deferred Ordinary Shares: Shares with delayed rights to dividend payments.
Founders’ Shares: Shares typically held by the founding members of a company, often with special rights.
Fully Paid Shares: Shares for which the shareholder has paid the full issue price.
Partly Paid Shares: Shares for which only part of the issue price has been paid.
Redeemable Shares: Shares that can be bought back by the issuing company at a future date.
Shares Outstanding: The number of shares that have been issued and are currently held by shareholders.

Online References

Suggested Books for Further Studies

“The Intelligent Investor” by Benjamin Graham: This book provides information on fundamental investing strategies.
“Common Stocks and Uncommon Profits” by Philip Fisher: Focuses on the qualitative and quantitative evaluation of shares.
“Security Analysis” by Benjamin Graham and David Dodd: A classic text for understanding value investing.
“Stocks for the Long Run” by Jeremy Siegel: Offers long-term strategies for stock market investments.
“The Little Book That Still Beats the Market” by Joel Greenblatt: Introduces investment methodologies for buying shares.

Accounting Basics: “Shares” Fundamentals Quiz

### What main rights do ordinary shares provide? - [x] Voting rights and potential dividends - [ ] Guaranteed dividends and liquidating dividends - [ ] Only voting rights - [ ] Neither voting rights nor dividends > **Explanation:** Ordinary shares provide voting rights in shareholder meetings and potential dividends, but they do not guarantee dividend payments. ### What distinguishes preference shares from ordinary shares regarding dividends? - [x] Preference shares guarantee fixed dividends - [ ] Preference shares guarantee double dividends - [ ] Ordinary shares guarantee higher dividends - [ ] No distinction, both have the same dividend policy > **Explanation:** Preference shares are entitled to a fixed dividend, which is paid out before any dividends are given to ordinary shareholders. ### What is a notable restriction on selling private company shares? - [x] They often must be offered to existing shareholders first - [ ] They can only be sold after receiving dividends - [ ] They must always be sold publicly - [ ] They do not have any selling restrictions > **Explanation:** Private company shares generally have restrictions on sale, such as a first offer to existing shareholders or approval from the company’s directors. ### What does it mean for a share to be "fully paid"? - [x] The full issue price has been paid by the shareholder - [ ] The shares have maximum voting rights - [ ] The shares have high dividend rates - [ ] The shares can no longer be sold > **Explanation:** Fully paid shares are those for which the shareholder has paid the entire issue price. ### Which shares get priority during company liquidation? - [ ] Deferred ordinary shares - [ ] Ordinary shares - [x] Preference shares - [ ] Partly paid shares > **Explanation:** During liquidation, preference shares usually have priority over ordinary shares in terms of capital repayment. ### Can shares in public companies be freely traded? - [x] Yes, on stock exchanges - [ ] No, they always require board approval - [ ] Only during annual general meetings - [ ] Only within a set group of investors > **Explanation:** Shares in public companies can be freely traded on stock exchanges allowing them to be bought and sold by any investor. ### How does cumulative preference share function? - [x] Retains unpaid dividends to be paid in the future - [ ] Ignores unpaid dividends - [ ] Pays dividends only during liquidity events - [ ] Has higher voting rights > **Explanation:** Cumulative preference shares accumulate unpaid dividends to be paid out in future years when the company can afford to pay them. ### What is limited liability in the context of shares? - [x] Shareholders' losses are limited to their investment - [ ] There are no liabilities - [ ] Shareholders can be held responsible for company debts - [ ] Shareholders have unlimited profit potential > **Explanation:** Limited liability ensures that shareholders can lose only the amount they have invested and are not liable for company's additional debts. ### What are "shares outstanding"? - [x] Total number of shares issued and held by shareholders - [ ] Shares held only by the company's founders - [ ] Shares not yet purchased by investors - [ ] Shares that have had their issue price paid > **Explanation:** Shares outstanding represent the total number of shares that have been issued and are currently held by shareholders, excluding shares repurchased by the company. ### What type of shares would likely be issued to attract long-term investors with voting power? - [ ] Preference shares - [ ] Deferred shares - [x] Ordinary shares - [ ] Redeemable shares > **Explanation:** Ordinary shares are likely to be issued to attract long-term investors as they typically come with voting rights, allowing shareholders to influence corporate governance.

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