Shares, Share prices and market capitalisation

What is a company?

• A company is a separate legal entity

• The owners of a company are shareholders

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

Public limited companies:

• 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

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

Rewards from being a shareholder:

• Dividends

  • 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

• 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

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)

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

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

Factors within the company’s control:

• Financial performance (e.g profit growth)

• Dividend policy

• Relationship with key investors (incl. communication)

• Management Reputation

Factors outside the company’s control:

• State of the economy

• General market sentiment

• Industry developments potential for takeover

• Alternative investments in the company’s sector

Share prices and profit warnings:

• 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’

Share prices and market capitalisation:

• Market capitalisation represents the total market value of the issued share capital of the company

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