Cambridge AS A Level Business Studies/ ZIMSEC Advanced Level Business Studies/ Business Enterprise Skills Notes: Types of businesses: Introduction To Shares

  • It has already been said that the capital of limited liability companies is divided into units
  • These units are known as shares
  • Investors in these companies are known as shareholders i.e. they own/hold shares that represent their part ownership in the company
  • Sometimes shareholders are issued with a share certificate that shows:
    • Certificate number
    • Company name and registration number
    • Shareholder name and address
    • Number of shares owned
    • Class of shares the shareholder was issued with, not all shares are the same and it is entirely up to the company which classes/types of shares it wants to issue
    • The date when the shareholder was issued with the shares
    • Amount paid (or treated as paid in the case of bonus shares or other shares that are freely issued or issued below their par value) on the shares
  • All shares used to have a par value i.e. a face value that ostensibly show the unit of capital they represent, often they are sold above or below this amount for this reason modern shares sometimes don’t have a par value
  • Shareholders receive a dividends
  • A dividend is a share of after-tax business profit that is distributed to shareholders
  • Generally, there are two types of shares:
    1. Ordinary shares
    2. Preference shares

Ordinary shares

  • these represent equity ownership in the business (i.e. they are owned by the owners of the business)
  • This means that those who own these shares are considered to be the actual owners of the business
  • Ordinary shares have voting rights which entitle them to attend and vote during the Annual General Meeting
  • An Annual General Meeting is a meeting where shareholders meet and make voting decisions regarding the future course of the company, in most jurisdictions (including Zimbabwe) an AGM has to be held at least once every year
  • Ordinary shareholders have limited liability which means that they only lose the amount invested and not their private assets
  • In the event of liquidation, they are the last to receive their invested amounts after everyone (debentures, creditors and preference shares),
  • They do not have a fixed rate of dividends and may not receive a dividend at all
  • They however usually have preemptive rights to buy shares in the event of a rights issues
  • A rights issue is when additional share capital is issued by a company
  • To preserve the current ownership structure of the company ordinary shares are issued on a pro-rata basis i.e. in a ratio based on the current structure

Preference shares

  • This is capital stock that is paid a fixed rate of dividends before the ordinary shares have been paid
  • Usually, this is based on the amount invested for example 5% Preference shares are shares that payout 5% as dividends on the amount the shareholder invested
  • They have a preferred dividend which means they receive their dividends before ordinary shareholders get theirs
  • In the event of liquidation preference shareholders receive their capital contribution before ordinary shareholders but after creditors and debentures.
  • They do not carry voting rights at Annual General Meetings nor do they usually have preemptive rights to buy shares.
  • Cumulative preference shares– these are a special class of shares whose dividends are cumulative i.e. in years in which, due to some circumstances, their dividend is not paid it is paid in later periods together with the dividends of that later period i.e. the dividend cumulates.

Other ways to group shares

  • Besides the methods above shares can also be grouped and described in other ways depending on their characteristics.
  • These methods include:
  • Convertible shares-these are shared that can be, at a later predetermined date and at the discretion of the shareholder, be converted into another class of stock.
  • For example convertible preference shares that can be converted into ordinary shares at a certain date.
  • Redeemable shares-these are shares that can be bought back by the company on a later predetermined date.
  • For example, Redeemable preference shares that the company can buy back at a future date

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