Company shares and shares capital explained
In this article, we'll cover:
What are company shares?
A company share is a part of a limited company owned by a shareholder or member. Shares represent ownership of a company. The more shares a person holds, the higher percentage of the company they own and control.
What is share capital?
Share capital is the amount of money used to buy company shares.
What are the four types of shares?
Most limited companies categorise shares in four different ways:
- Ordinary shares
- Non-voting shares
- Preference shares
- Redeemable shares
When a limited company is set up, the owner can decide which are the best types of shares to issue to shareholders.
Share types explained
Ordinary shares are the most common type of share. They carry one vote per share with the shareholder entitled to equal participation in the company’s dividends.
If the business is ended, the proceeds of ordinary shares are allocated equally between shareholders.
Non-voting shares usually do not give the shareholder the right to vote or participate in general meetings. They are given to employees so that payments can be made through company dividends. This allows both employees and management to be more tax efficient.
Preference shares provide shareholders with an annual dividend payment. They take preference over ordinary shareholders and are normally paid a percentage value of the share’s nominal value (its value when issued).
Redeemable shares are issued to shareholders under an agreement that they will be bought back by the company in the future. The buy back date is usually fixed, and shares are often bought back at their nominal value.
How are shares valued?
Shares in limited companies are often valued using the nominal value of the shares. This method, however, does not reflect the true monetary value of the share if sold. The real value of a share in a limited company depends on the value of the company.
To find out the open market value of limited company shares you will need to look at the company accounts. Factors such as company assets and company dividends will affect the market value of any shares.
For shares that are listed on the Stock Exchange, value information is available in the financial pages of most newspapers. The government website also provides guidance on share value calculation.
Share value vs share capital
Share capital is the amount of money used to buy company shares. The nominal value of company shares is determined when they are issued. If a company wants to expand, further shares can be issued at a later date.
Share value is the actual monetary value of company shares. The market value of shares is determined by the size and profitability of the company. Share value can fluctuate and is often more than the original price of the shares if they were sold.
Pros and cons of share capital
A company can raise money by selling shares to shareholders. The money raised is share capital. Some advantages of share capital include:
- A source of permanent capital for a company – shares are non-refundable and must be sold on to release equity.
- Dividends from shares are only paid if a company achieves certain financial targets.
Some disadvantages of share capital include:
- The more shares issued, the less control for the company owners – for a majority stake owners must hold more than 50% of all shares.
- Takeover vulnerability – If enough shares are sold, an individual may convince other shareholders to vote for new management.
What is the difference between stocks and shares?
Stocks and shares are often used interchangeably. Their true business definition, however, is distinctly different.
Stocks are a more general term used to describe an investment in a part of a company. Stocks represent partial ownership of a company and are traded on the stock market, paying stockholders annual dividends.
Shares are a measurable unit of stock. Shareholders own a certain percentage of a company’s stock. While stocks can refer to ownership of several companies in the Stock Exchange. Shares always refer to an exact percentage ownership of a specific company.
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Are shares a good investment?
If you have financial savings that you do not immediately need access to, investing in shares can be a shrewd financial decision. Before investing in shares, you need to be certain that you won’t need that money for at least five years.
Financial markets fluctuate from year to year. Even if you invest during a time of economic uncertainty, over the five years you are investing, the market will have time to stabilise and pay you dividends once the term ends.
What is an example of share capital?
Share capital is the money raised by a company by selling shares. For example, if a company sells 1,000 shares at £15 per share, they will raise £15,000 of share capital.
How is share capital calculated?
The simplest way to calculate share capital is to use the following formula: Issue price per share x number of outstanding shares = share capital value. For example, £10 x 10,000 = £100,000.
Do shareholders get paid?
Yes. Shareholders usually get paid annual dividends that are dependent on the company’s net profits.
Do you have to pay tax on shares?
Yes. You usually pay a 0.5% tax rate when buying shares. If you transfer shares into a depository receipt scheme or clearance service, you pay tax at 1.5%. Shares are taxed at the price you paid for them (nominal value) not their market value.
How do you sell shares?
The easiest way to sell shares is through a broker. You can also sell shares directly back to the company that issued them.
Can you have 50/50 shares in a company?
Yes. 50/50 ownership of a business, however, means that there isn’t a majority shareholder with control over the business. In this situation, it’s a good idea to set up a shareholder’s agreement in case of deadlock on decisions.