Equities

Formation of a Company

Two legal documents have to be created in order for a company to be formed:

  • Memorandum of Association: a statement signed by all initial shareholders that agree to form the company

  • Articles of Association: the rules regarding how the company will be run. This is agreed by the shareholder, directors and company secretary

Types of Company:

There are 2 types of company:

  • Private Limited Companies (Ltds) -

    • can have one shareholder

    • shares are traded in private, meaning there is no clear ‘market price’ for the shares. The price of the shares must be negotiated between buyer and seller

  • Public Limited Companies (plcs)-

    • must have at least two shareholders

    • the shares can be listed on a stock exchange, but do not have to be

    • by listing on stock exchange there is a ‘ready’ market price for the shares → determined by demand and supply

Types of Equities:

There are 2 types of shares:

  • Ordinary Shares - what most people simply call ‘shares’

  • Preference Shares -

Ordinary Shares:

  • Full voting rights at the Annual General Meeting (AGM)

  • Dividends are paid which are variable - some companies declare a ‘null’ dividend

  • Ordinary shareholders are paid last in event of ‘liquidation’

Preference Shares:

  • No voting rights

  • Pay a fixed dividend, as a percentage of the issue price

  • Dividends are paid ahead of ordinary shareholders

  • Preference shareholders are paid before ordinary shareholders

Types of Preference Shares:

  • Cumulative Preference Shares - if insufficient profit made, it will be held over to pay for preference shareholders dividend in the future

  • Non-cumulative Preference Shares - insufficient profit to pay preference shareholders, dividend is lost in that year

  • Convertible Preference Shares - preference shareholders have the option to be converted to ordinary shares

  • Redeemable Preference Shares - A specific date where the preference shares will be cancelled, normal value of the preference share will be paid to the current owner

The Annual General Meeting (AGM)

  • Held once a year

  • Ordinary shareholders can vote on remuneration packages of directors and appointment/removal of directors

  • Ordinary shareholders can vote by ‘proxy’

  • Special resolution - If change is proposed to the companies structure/constitution it must be approved by 75% of the owners of ordinary shares.

  • In the event of something unusual happening (eg. takeover) - and Extraordinary General Meeting may be held