Shares and their types

Well, before I start talking about shares I’d like to draw your attention to different types of companies. Individuals and groups of people doing business as a partnership can have limited or unlimited liabilities for debts. If a company has limited liabilities for debts it means that in case of its liquidation all the assets are sold to pay off all the creditors, but if the assets don’t cover the debts, they remain uncover. In case if an unlimited company is wound up its owners may have to sell nearly all their possessions in order to pay their debts.

There are also private limited companies and public limited companies. What is the difference? In case of a private limited company its shares are available only for a definite amount of people while shares of a public limited company can be bought by any person.

And now let’s proceed to shares. In simple words, a share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company. A share is issued by a public limited company or can be purchased from the stock market.

Professional investors buy shares in the hope of benefiting from a rising stream of income over the long term. Shares entitle their owners to vote at a company’s Annual General Meeting and to receive a proportion of distributed profit in the form of a dividend (or to receive part of the company’s residual value if it goes into liquidation).

A publicly quoted company has to fulfill a large number of requirements, including sending their shareholders an independently audited report every year, containing the year’s trading results and a statement of their financial position.

So why do companies go through all these difficulties? The simple answer is that issue of shares raises funds to allow these companies to expand into bigger and hopefully better businesses.

Now let’s examine shares closely. The fact of issuing shares for the first time is known as floating a company (or making a flotation). Companies generally use an investment bank to underwrite the issue, i.e. to guarantee to purchase all the securities at an agreed price on a certain day, if they cannot be sold to the public.

Companies wishing to raise more money for expansion can sometimes issue new shares, which are normally offered first to existing shareholders at less than their market price. This is known as a rights issue. Companies sometimes also choose to capitalize part of their profit, i.e. turn it into capital by issuing new shares to shareholders instead of paying dividends. And this is knows as a bonus issue.

There are a number of different types of shares. Ordinary shares are the most common shares, also known as equities. The ordinary shareholders bear the largest part of risk, but the returns can be much higher than with other forms of investment. Ordinary shareholders are entitled to one vote per share, which gives them more say in the running of a company, but the amount of dividend they receive (if any) is determined by the company depending on how much profit has been made.

Preference shares have a fixed dividend which must be paid before the ordinary shareholders can receive their dividend, which guarantees a return on investment as long as the company is making profit. However, if the company doesn’t make a profit, the preference shareholders will not be paid their dividends either. Unlike the ordinary shareholders, the preference shareholders are not entitled to vote in company matters.

Preference shares can be of two types: cumulative preference shares and convertible preference shares. Cumulative preference shares is a special of preference shares which offers a safer return on investment. This is because if the company cannot pay the dividend one year, the outstanding amount is carried over to the following years. That means that rather than losing his dividend in a year where the company runs at a loss, the shareholder can expect to receive it one or more years later along with the dividend from the following years.

Convertible preference shares is another type of preference shares which pays a fixed rate of interest until a certain time. After this time it is converted into an ordinary share on which the holder receives a dividend rather than interest.

And in the end I’d like to say that the choice of shares depends on readiness of an investor to risk.