3.2 Stock issuance
One common way in which Ltds and Plcs raise finance is through a share issue. Shares represent the portions in which a company’s capital is divided. They entitle the holder to receive a portion of future profits in the form of dividends, usually paid yearly or half-yearly at the discretion of the company, subject to approval by shareholders.
There are two types of shares: ordinary and preference shares.
- Ordinary shares (or common shares) have no special rights or restrictions attached to them. Each share provides the shareholder with equal rights to vote at general meetings (each share typically entitling its owner to cast one vote), receive a share of the company’s profit in the form of dividends, and receive a share of any remaining capital or assets should the company be wound up.
- Preference shares (or preferred shares) typically do not give shareholders voting rights. However, these shares come with an advantage over ordinary shares in terms of dividend distribution. Preference shareholders, who are entitled to a fixed rate dividend, have a preferential claim to dividends over ordinary shareholders, even if the company enters liquidation. Further, in case of insolvency, preferred shareholders have a higher priority claim to the company’s assets.
Shareholders expect a return on their investment. One way in which the ownership of shares gives a return is through dividends, which are paid at the company’s discretion. Most shareholders, however, hope to gain an additional return in the form of capital gains, that is, an increase in the value of the company. Any capital gain will be realised when the shares are sold to another party for a higher price at a later date. Investors’ expectations about the performance of these two components vary across countries and sectors of operation.