Capital Markets Securities - Shares
Today we’re going through shares, otherwise known as Corporate Equity Capital. Every company that is incorporated (if the name has an "inc" or an "ltd" in it) has shares. People who own these shares own the company. This is different from owning the company's property, the company owns the property.
How do you know if you own a share? Historically, the holder of a share would originally have a paper share certificate to prove it. When a stock was sold from one person to the next, the paper share certificate would be destroyed, and a new one issued. In the current day, however, all this is done electronically and most shareholders need not see or hold a paper stock certificate.
Generally, there are two broad classes of shares: ordinary shares and preference shares.
Ordinary shares are the simplest form of shares: they represent ownership in a company and give certain rights and privileges. An example of such a right is the right to vote at general meetings of the company. Such meetings are held to make major decisions regarding the company that do not involve day to day or trivial decisions. General meetings are not called to decide which brand of computer to buy, or even to decide whether to rent an office space. General meetings are called for the weightier things, such as to elect directors, declare dividends or appoint auditors.
Preference shares are shares that offer their holders an advantage over ordinary shares. There are many variations of preference shares, which can offer the shareholder a preference in a few different ways. They are principally given a preference regarding dividends, capital protection and voting rights. Typically, however, the preference is offered at a tradeoff, such as by reducing voting rights but offering a higher dividend.
Dividends
Dividends are a payout of the company’s profits to shareholders. Preference by dividends would typically entail a higher dividend per share or have a right to receive dividends in situations which ordinary shareholders would be deprived of dividends.
Capital Protection
These preference shares give the shareholders priority (over other shareholders) in the event of an insolvency. This would mean that these shareholders would get better protection over the money they put into the company. They would still rank below those with bonds, but they would rank above other shareholders in priority.
Voting Rights
Preference shares may also differ in terms of the voting rights that are available to a shareholder. They may get no voting rights (within what is allowed under the Companies Act, for Singapore companies) or may get increased voting rights for particular matters.
In addition to varying the ways which preference shares prefer shareholders, companies can also vary the holding of the preference share.
Redeemable Preference Shares
Companies may choose to offer a preference share that can be bought back (or redeemed) by the company at a fixed price. This can be triggered by the shareholder or the company, depending on what is agreed.
Convertible Preference Shares
Companies may also choose to offer preference shares that may be converted to other forms, such as ordinary shares. This would be converted at a pre-agreed rate.
And that’s a short general introduction to shares! Hope it was easily digestible. Next time around we’re looking at how shares may be sold on the public market.