Shares, shareholders and share prices

• an incorporated business (a company) is a separate legal activity - the owners of a company are shareholders
• two types of companies

  • private limited
  • public limited
• private limited company


  • most popular
  • shareholders are invited
  • shares cannot be traded publicly
  • quick and cheap to set up
• public limited company


  • minimum share capital of £50,000
  • shares can be traded publicly on the stock market
  • many shareholders
  • detailed disclosure of information required
• dividends


  • payments made to shareholders by the company from earned profit
  • amount is paid 'per share' e.g £1 per share held
  • usually no requirement to pay dividends
• capital growth


  • arises from an increase in value of the business
  • reflected in an increase of share price
  • only realised when share is sold
  • business value can go both up and down
• what is a share?


  a share is an individual part of the total issued share capital of a company - most shares are 'ordinary shares' meaning:

  • equal voting rights based on the number of shares held
  • the shareholding percentage = the number of shares compared with the total shares
  • shares qualify for a dividend but only if one is paid
• share prices


  • the price paid to acquire ownership of the share
  • when shares are first issued, the price is called the 'issue price' (£1 share issued for £1)
  • however, shares can be issued for more than the issue price (£1 share for £10)
  • this results in a share premium being established
• once shares have been issued, they are capable of being traded either privately or using a public stock exchange - this interaction of demand and supply results in the determination of a share price
• • if demand is higher than supply then share price rises
  • a falling share price indicates there are more sellers than buyers
• share price of private company

  • set when shareholders 'subscribe' for their shares
  • share price only determined when shares are bought or sold
  • no active market so its hard to judge its current value
• share price of public company


  • very transparent - prices displayed publicly in real time
  • all trades are disclosed
  • share prices widely published and tracked
• market capitalisation

  • the total market value of the issued share capital of a company based on the latest share price
  • calculated by doing (share price per share * number of shares in issue)
• the share price and market capitalisation of a private company tends only to be determined when the business itself is being bought and sold, or when new shareholders are introduced through a share issue
• factors within the company's control that influence whether a share price rises or falls

  • financial performance
  • how profits are distributed to shareholders
  • relationship w/ key investors
  • management's reputation
• factors outside the company's control that influence whether or not a share price rises or falls

  • state of the economy
  • general attitude of investors towards a stock/the stock market
• quoted company is also known as a public limited company
• importance of market expectations for public companies


  • share price of company is significantly influenced by market expectations of a business' performance
  • unexpected warnings indicating that market expectations will not be met almost always results in a significant fall in share price
  • these warnings are also known as 'profits warning'
• share capital in business finance


  • known as 'equity finance' - finance that is provided by those who share the equity (ownership) of a company
  • the main alternative to this is 'debt finance' - finance provided by external funders who receive a return but do not own a share
• equity finance


  • returns = dividends and capital growth
  • part of ownership of company
  • long-term source of finance
  • returns tend to be higher
• debt finance


  • commonly in the form of loans or overdrafts
  • returns = interest on amount loaned and outstanding
  • repaid over an agreed period
  • can be short or long term
  • no participation in ownership of the company
• company issues shares -> shareholders buy these new shares -> company has more cash and shareholders
• methods of issuing new shares for a public company

  • flotation
  • rights issue
• flotation


  • share issued on stock exchange for the first time
  • opportunity for existing shareholders to realise profits on their investment
  • costly and time consuming
  • typically aims to raise at least £25-50 mil of new capital
• rights issue


  • fresh issue of new shares to existing shareholders
  • shareholders have the 'right' to subscribe for the new shares, usually at a discount of the existing share price
  • often done to help finance a major expansion or to help refinance a business in difficulty
• advantages of raising finance by issuing new shares

  • able to raise substantial funds
  • equity rather than debt
• disadvantages of raising finance by issuing new shares


  • can be costly and time consuming
  • existing shareholders' holdings may be diluted
  • equity has a cost of capital that is higher than debt