LOUISE FAIRSAVE: Understanding share capital
Maybe you have always wanted to try investing in the stock market. The financial success stories that report on the investor buying the right stock at the right time and gaining a significant return on the investment are attractive. Before you invest, let us discuss share ownership.
Typically, a business is set up as a sole proprietorship, a partnership, or a limited liability.
The limited liability is most popular for operating a business. It offers significant protection to the shareholder from losing more than his investment in the business should the business fail.
The limited liability form of business raises part or all the funds to set up and operate the business through the issue of shares. A share in the company may be sold for a fixed sum when issued by the company to the shareholder.
This fixed sum can be any amount, usually somewhere between $1 and $10 per share. As a shareholder, you can offer the shares you bought for sale. For a public company, the shares can be offered for sale to any member of the public through a broker.
For a private company, you can offer your shares to other existing shareholders. You may also offer your shares to a new investor as long as no other existing shareholder or the company does not make you a better offer.
A private company is one that by its Articles of Incorporation sets limitations on its share ownership. In the past, normally the total number of shareholders was limited to 50. For example, a company can limit its shareholders by defining the common bond between possible shareholders, say, a company that only allows staff members of a particular company to be shareholders.
A private company is often called a closely held company because of the small number of shareholders. If a company is not private, it is a public company.
The public company has no limitation on the number or kind of shareholders it may have. Only a public company may be listed on the stock exchange and not all public companies are listed. A company must agree that it wants to be listed on the stock exchange and then, it must meet certain stipulated requirements before it can be listed.
A share in a company represents a unit of ownership in the business. Shares may come in various classes. For example, they may be Class A or Class B shares. Typically, the class of the share defines the differing voting rights of the shareholders.
Preference shareholders usually have a stated dividend rate for their shares and these shareholders must be paid before any dividend payment can be made to the common shareholders. The rate of dividend to the common shareholder is usually decided on from year to year by the directors of the company.
Shares in a public listed company may be bought through a stockbroker. For shares being issued by the company for the first time, these shares may be bought through the agents declared in the prospectus. For an unlisted public company or for a private company, you can advise the corporate secretary of the company of your interest in purchasing shares that may become available.
New shares in a company may be purchased for the fixed sum presented in the related prospectus. However, trading of shares currently held by a shareholder is at the agreed price between the selling and purchasing parties.
In the case of new shares the sale proceeds go to the company to finance its ongoing operation. The proceeds of shares traded by a shareholder go to that shareholder selling the shares.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.