A share is exactly what it says it is - a share of a business. When a share is purchased, the buyer becomes a part owner - a shareholder - of a business. Companies issue ordinary shares, or “equities”, and they represent the money that shareholders originally put into building up the business.
If the company makes a profit, shareholders are entitled to a share of it - paid to them in the form of a dividend. Dividends can vary from year to year. Taking into account the overall size of the year’s profits, the directors recommend how much money the company should keep in reserve for future expansion (i.e. retained earnings), and how much should be distributed to shareholders (i.e. dividends).
When a company wishes to expand, it can do so in a number of ways. It may decide to use excess profits or retained earnings, but often this is impossible on economic grounds where expansion requirements exceed the retained earnings. Alternatively, the company can raise capital either by issuing bonds or shares.
A company’s basic resource is the stream of cash flow produced by its assets. If the company is financed entirely by common stock, all cash flow belongs effectively to the shareholders. When it issues both debt and equity securities, i.e. bonds and shares, it splits up the cash flow into two streams, a relatively safe stream that goes to the debt-holders (i.e. interest payments) and a more risky one that goes to the stockholders (i.e. dividend payments). The company’s mix of different debt vs equity is known as its capital structure.
Shares are also defined as a number of equal indivisible rights or interests in the management, profits and ultimately the assets of a company to those who own the shares, and are normally evidenced by a share certificate. This is a document furnished by the company, and, in particular, the transfer secretaries of the company, to the shareholder certifying details of his ownership of the shares.It is important to note that with STRATE and dematerialisation of share certificates in South Africa, the share registers of companies is electronic, with no share certificates being issued. This will not detract from shareholders rights, but rather reduce certain risks such as fraudulent share certificates.
There are different classes of shares, namely: ordinary shares; preference shares; participating preference shares; convertible preference shares; redeemable preference shares; founders’ or deferred shares bearer shares; etc.