A share is, in its most general definition, a portion of the property of a firm, this part of the property may confer on its owner or holder a right of participation in profits and a right of participation in decision-making.
Next, as an introduction, the prominent economist Xavier Sala i Martín explains in a simple way what a share is and what can be done with a company share.
What is a company share
Now we will delve into these concepts, going from the general to the specific:
Action. Movable value that represents an aliquot (proportional) part of the capital or property of a public limited company and that grants its owner the rights of the shareholder. (Sanz, p.10)
It is a title that represents the aliquot part of the capital of a company. Each share grants rights to its holder or holder, such as participating in the shareholders' meeting, participating in the benefits and proving the value of the company, to the extent of their participation. (Santandreu, p.12)
A share is a financial asset constituting an aliquot part of the capital stock of a company. Its ownership confers on the holder (shareholder) a series of economic and political rights in relation to the issuing company. In accounting they are consigned within the Net Equity of the Company. Based on their name, it is possible to distinguish between registered shares and bearer shares. In the first case, the security incorporates the name of its holder, the transmission system of the securities being more rigid than in the case of bearer shares, whose negotiation capacity is full. (Duran, p.10)
A share is a title issued by an entity, as an aliquot part of its share capital, in order to raise resources, without assuming the obligation, in principle, of their remuneration and / or reimbursement. The titles will generally give the holder, as a participant in the property of the company, the right to vote in the company's shareholders' meeting, as well as to participate in the distributions of funds that are agreed by reason of distribution of dividends, reserves, capital amortizations and dissolutions. When the rights and obligations (both political and economic) of the issuer or the holder are configured differently, they will be shares other than ordinary: privileged, preferred, non-voting, etc. The possibility,conditions and characteristics of issuance of these variants of shares will be in accordance with the provisions of the commercial regulations of the corresponding jurisdiction, as well as in the bylaws of the company. They are freely transferable, with more or less formality, depending on whether they are materialized in bearer titles, registered titles, public deed or book entries, the latter being the most used for those listed on the stock market. (Mora, p.12)
From the previous definitions, the main elements of the action can be extracted:
- It is the security in which the participation rights of the partners are incorporated.It represents a part of the social or patrimonial capital (the capital that belongs to the owners) of a company.It confers certain fundamental rights to its owner: participation in the administration to Through voting, profit sharing and liquidation, as well as priority to maintain its proportion when new shares are issued. It is indivisible, that is, when a single share belongs to several people, they must designate a common representative.
Classes of shares
Gitman and Zutter (p.249) classify stocks as follows:
Common actions
Common shares will be those that participate in profits in proportion to their nominal value. Unless otherwise stated, the word action means "common action."
The following are its main features and elements (Gitman and Zutter, p.250-252):
Property
- Private actions. The common shares of a firm that are owned by private investors; These shares are not traded on the stock exchange. Public shares. The common shares of a company that are owned by public investors; These shares are traded on the stock exchange. Broad participation shares. Common stock of a company owned by many unrelated individual or institutional investors.
Par value of common shares
Arbitrary value established for legal purposes in the corporate bylaws of the company; The total number of outstanding shares is obtained by dividing the book value of the common shares by the par value.
Right of preference
It allows common shareholders to maintain their proportional participation in the corporation when new shares are issued, thus protecting them from the dilution of their ownership.
- Property dilution. Reduction of fractional ownership of shareholders resulting from the issuance of additional common shares Dilution of earnings. Reduction of the shareholders' right to the profits of the company as a result of the issuance of additional common shares. Rights. Financial instruments that allow shareholders to buy additional shares at a price below the market price, in direct proportion to the number of shares they own
Authorized, outstanding and issued shares
- Authorized actions. Number of common shares that the charter of a company allows it to issue Shares outstanding. Common shares issued that are in the hands of investors, including public and private investors Treasury shares. Common shares issued that remain in the hands of the company; these shares were frequently repurchased by the company. Shares issued. Common shares that have been put into circulation; is the sum of outstanding shares and treasury shares.
Voting rights
Generally, each common share gives its holder one vote in the election of officers and in special matters. Votes are commonly transferable and are assigned at the annual shareholders meeting.
- Plural voting shares. Shares that carry multiple votes per share rather than the single vote per share that regular common shares are generally entitled to. Non-voting common shares. Common shares that do not have any voting rights; they are issued when the company wants to raise capital through the sale of common shares, but does not want to relinquish control of its votes.
Dividends
Common shareholders are not promised a dividend, but they expect certain payments based on the company's historical dividend pattern. Before companies pay dividends to common shareholders, they must pay any past dividend debt owed to preferred shareholders.
Preferred stock
Preferred shares grant their holders certain privileges that give them priority over common shareholders. Preferred shareholders are promised to receive a fixed periodic dividend, established as a percentage or dollar amount. How the dividend is specified depends on whether the preferred shares have par value.
- Preferred shares with par value. Preferred stock with a stated par value that is used with the specified dividend percentage to determine the annual dollar dividend Preferred stock with no par value. Preferred shares without an established par value, but have an annual dividend indicated in dollars.
Basic rights of preferred shareholders
- The basic rights of preferred shareholders are more favorable than the rights of common shareholders. They are considered almost debt, because in much the same way as interest on debt, they specify a fixed periodic payment (dividend). They differ from debt in that They do not have an expiration date. As they have a fixed claim on the income of the company, preferred shareholders are exposed to less risk. Preferred shareholders have priority over common shareholders in the distribution of assets in the event of the bankruptcy of the company. Preferred shareholders do not normally receive a voting right; however, preferred shareholders are sometimes allowed to elect a member of the board of directors.
Characteristics of preferred shares
- Restrictive agreements. The purpose of the restrictive agreements for an issue of preferred shares is to guarantee the continued existence of the company and the payment of dividends. Cumulative preferred shares. Preferred shares to which all past due (due) dividends must be paid, together with the current dividend, before paying dividends to common shareholders. Non-cumulative preferred shares. Preferred shares that do not accrue unpaid dividends (due). Redeemable preference shares. A redeemable preferred share allows the issuer to withdraw it within a certain period and at a specified price. Conversion option (preferred shares). A feature of convertible preference shares that allows holders to exchange one share for a set number of common shares.
In addition to common and preferred shares, other names of the different types of shares are known. The following classification is proposed by Quevedo (p.86):
Own and improper actions
- Own shares. Those that effectively represent a part of the capital stock, both in cash and in kind. Improper actions. Those that do not have the character of the aforementioned, such as work and enjoyment shares that grant their holders a participation in the benefit of society.
Released shares and paying shares
- Released shares. Those whose value has been fully covered by the shareholder. Paying actions. Those whose amount is not fully paid by the shareholder.
Shares with and without par value
- Shares with par value. Those that express in their text the part of the social capital they represent. Shares without par value. Those that do not refer to any part of the capital stock.
Nominees actions
Those that are issued in favor of a specific person.
Action in financial analysis, market ratios
Gitman and Joehnk (p.296) indicate that there are several common stock ratios that turn key pieces of information about the company into stocks. They are called common stock market ratios and they tell the investor exactly how much of the total profits, dividends and equity is allocated to each common share. Among the most popular market indicators are earnings per share, price-earnings ratio, dividends per share, dividend yield, payment ratio, and book value per share.
Earnings per share (EPS): Amount of annual earnings available to ordinary shareholders, expressed per share.
EPS = Net Earnings After Tax - Preferred Dividends / Number of Ordinary Shares Outstanding
Dividend yield: Measure that relates dividends to the price of shares and expresses the value of dividends on common shares in a relative (in percentage) rather than absolute (in monetary unit) manner.
Dividend yield = Annual dividends received per share / Current market price of the share
Price-earnings ratio: The price-earnings ratio (P / E) relates the earnings per share (EPS) of the company with the market price of its shares.
P / E = Market price of ordinary shares / EPS
Price-earnings to growth ratio (PEG). Financial ratio that relates a price-earnings multiple of a share to the growth rate of the company's earnings.
PEG ratio = P / E ratio of shares / Earnings growth rate of the last 3 to 5 years
Dividends per share: In the same way that the UPA seeks to translate the total dividends on total ordinary shares paid by the company into a figure per share.
Dividends per share = Annual dividends paid on ordinary shares / Number of ordinary shares outstanding
Reason for payment: Indicates how much of its profits a company pays to its shareholders in the form of dividends.
Payment ratio = Dividends per share / Earnings per share
Book value per share: It is simply another term to refer to equity (or equity). Represents the difference between total assets and total liabilities.
Book value per share = Book capital of ordinary shareholders / Number of ordinary shares outstanding
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Finally, a couple of video-lessons that explain the importance of shares for the markets and what it means to buy shares in a company.
Bibliography
- Durán Herrera, Juan José. Finance Dictionary. ECOBOOK, 2011. Gitman, Lawrence J. and Joehnk, Michael. Investment fundamentals. Pearson Education, 2009. Gitman, Lawrence J. and Zutter, Chad J. Principles of Financial Management. Pearson Education, 2012.Mora Enguídanos, Araceli. Dictionary of Accounting, Auditing and Management Control. ECOBOOK, 2009. Quevedo Coronado, Ignacio. Commercial Law. Pearson Education, 2004.Santandreu, Eliseu. Dictionary of financial terms. Ediciones Granica SA, Jan 1, 2002 Sanz Santolaria, Carlos Javier. Economic, accounting, commercial and financial dictionary. Management 2000, 2002.
