posted 08-04-2003 12:57 AM         

Shares or stockes - what are they?

When buying shares in a company, you are buying a share of the ownership in the underlying company, complete with the right to a share in the firm's future earnings. The more shares you buy, the more of the company you own.

So why does a company issue shares? , Usually a company will issue shares when it needs to raise capital (money) for expansion, research and development, for its general operations or to pay off debt. The company could also use other options such as getting a loan from a bank or issuing bonds or debentures. One of the advantages of issuing shares is that shares raise capital without debt and without a legal obligation to repay the funds, unlike bank loans or bonds, which are direct debt obligations of the issuing corporation,

The first time a company sells stock to the public it is known as a Public Float or Offering, also referred to as 'going public'. There are thousands of publicly listed companies you can purchase shares in, from a diverse range of sectors.

There are also different types of shares.

1. Ordinary shares

The most common type of shares is known as ordinary shares. Purchasing ordinary shares gives the owner a stake in the company and an entitlement to dividends. Dividends are the part of the company's profits that are paid out to the shareholders every six months when the company is making a profit. Most ordinary shares also give the shareholder a right to attend the company’s annual general meeting and vote on issues relevant to the company’s future.

2. Preference shares

Preference shares return a fixed dividend to the investor that is not linked to the company's annual profit result. Although preference shareholders receive dividends before ordinary shareholders, they do not receive the same voting rights as ordinary shareholders.

3. Contributing shares

Contributing shares are those that have not been fully paid for and require further payment in the future. Dividends are generally paid according to the proportion of the paid-up amount.

4. Bonus issues

A bonus issue is a free issue of new shares to existing shareholders. Every now and then when a company makes an extraordinary profit, or if it has amassed accumulated profits over a period of time, it gives its shareholders a present of a bonus issue of shares at no cost. Receiving a bonus issue does not increase the proportion of a company owned by the shareholder, as all shareholders receive the same present in proportion to their ownership of the company. It is, in effect, a cashless dividend.

5. Rights Issues

A rights issue is also an issue of new shares to existing shareholders. However, these are not free. A rights issue occurs when a company needs to raise extra capital and it gives its shareholders a right, but not an obligation to purchase extra shares. There are two types of rights issues, renounce able and non-renounce able rights. Renounce able rights can be traded on the share market if an existing shareholder does not wish to purchase the new shares being offered to them. They are therefore of some value to the shareholder - a little bonus. Non-renounce able rights cannot be traded or sold to others, so if the shareholder does not take up their right to buy the new shares by a particular date, the rights are of no value to them.