Share Capital

Introduction to Share Capital

Ordinary shares

Shares present the basic units of ownership of a business. Every companies issue ordinary shares. Ordinary shares are often termed as equities. The nominal value of such types of shares is at the discretion of the people who start up the company. For instance, if the primary share capital is to be £50,000, this could be two shares of £25,000 each, 5 million shares of one penny each or any other combination that provides a total of £50,000. All shares must have equal value.

Actually, £1 is the normal maximum nominal value for shares. Shares of 25 pence each and 50 pence each are possibly the most common.

Altering the nominal value of shares

As described earlier, the promoters of a new company might create their own choice of the nominal or par value of the shares. This value require not be permanent. At a later date the shareholders can decide to change it.

Assume that a company has 1 million ordinary shares of £1 each and a decision is taken to alter the nominal value of the shares from £1 to £0.50, other words to halve the value. This would lead the company to issue every shareholder with a new share certificate (the shareholders' proof of ownership of their shares) for precisely twice as many shares, each with half the nominal value. The outcome would be that each shareholder retains a holding of similar total nominal value. This process is termed, not surprisingly, as splitting the shares. The reverse, reducing the number of shares and raising their nominal value per share to compensate, is termed as consolidating. Because each shareholder would be left, after a split or consolidation, with precisely similar proportion of ownership of the assets of company as before, the process should not raise the value of the total shares held.

Preference shares

A number of companies not only issue ordinary shares, but also contain other classes of shares, preference shares being the very common. Preference shares assurance that if a dividend is paid, the preference shareholders will be permitted to the first part of it up to a maximum value. This maximum is generally described like a fixed percentage of the nominal value of the preference shares. If, for instance, a company issues 10,000 preference shares of £1 each with a dividend rate of 6%, the meaning of this is that the preference shareholders are entitled to receive the first £600 (i.e. 6 per cent of £10,000) of any dividend that is paid through the company for a year. The excess over £600 goes to the ordinary shareholders. Generally, any undistributed profits and gains also accumulate to the ordinary shareholders.

The ordinary shareholders are the main risk-takers because only after other claims have been satisfied they are entitled to share in the profits of the company. Though, there are no upper limits on the amount through which they may benefit. The potential awards available to ordinary shareholders imitate the risks that they are ready to take. Because ordinary shareholders take most of the risks, power generally resides in their hands. Generally, only the ordinary shareholders are capable to vote on issues that influence the company, like who the directors should be.

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