Shares, Share prices and market capitalisation

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14 Terms

1

What is a company?

  • A company is a separate legal entity

  • The owners of a company are shareholders

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2

What are private limited companies?

  • The most popular form of an incorporated business

  • Privately-owned

  • Shares cannot be traded publicly

  • Usually just 1 or a few shareholders

  • Quick and cheap to set up and administer

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3

What are public limited compnanies?

  • Minimum share capital £50,000

  • Shares may be traded on a public stock market

  • Usually many shareholders

  • More detailed disclosure of information is required

  • Costly to administer

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4

What is a share?

  • An individual part of the issued share capital of a company

  • Most shares are ‘ordinary shares’

    • Equal voting rights based on the number of shares held (shareholding)

    • Shareholding % represented by the number of shares held compared with the total number of shares issues

    • Qualify for a dividend- if one is paid

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5

What is a dividend?

  • Payments made to shareholders by the company from earned profits

  • The amount paid is ‘per share’ - e.g £1 per share held

  • Normally no requirement to pay dividends, but most quoted companies

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6

What is capital growth (capital gains)?

  • Arises from an increase in the value of the business

  • This increased the share price

  • Only realised when a share is sold (the price paid)

  • No guarantee that a shareholding will increase in value

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7

What is a share price?

  • Like any other price, a share price is determined by the interaction of supply and demand

  • If demand for a share > supply (more buyers than sellers) then the share price should rise

  • A falling share price indicates excess supply (more sellers than buyers)

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8

What happens in a private company?

  • Initially set when shareholders ‘subscribe’ to their shares

  • Thereafter only determined when shares are bought or sold

  • No active market in the shares of a private company- so hard to judge the current value

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9

What happens in a public company?

  • Highly transparent - displayed publicly, in real-time

  • All trades are disclosed (how many bought/sold and for what price)

  • Share prices are widely published and tracked

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10

What factors are within a company’s control?

  • Financial performance (e.g profit growth)

  • Dividend policy

  • Relationship with key investors (incl. communication)

  • Management Reputation

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11

What factors are outside the company’s control?

  • State of the economy

  • General market sentiment

  • Industry developments potential for takeover

  • Alternative investments in the company’s sector

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12

What are the warnings of share prices and profit?

  • The share price of a quoted public company significantly influences market expectations of business performance

  • Unexpected warnings indicating that market expectations will not be met almost always result in a significant fall in share price

  • Such bad news is known as a ‘profits warning’

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13

What is market capitalism?

It represents the total market value of the issued share capital of the company

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14

What is the equation for market capitalism?

Share price (per share) x Number of shares in issue

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