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You are here: Home > Learning Materials > Accounting > Financial Accounting > Sources of Finance > Ordinary Shares |
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Sources of FinanceOrdinary SharesOrdinary shares are also known as equity shares and they are the most common form of share in the UK. An ordinary share gives the right to its owner to share in the profits of the company (dividends) and to vote at general meetings of the company. Since the profits of companies can vary wildly from year to year, so can the dividends paid to ordinary shareholders. In bad years, dividends may be nothing whereas in good years they may be substantial. Some businesses may choose to pay out a dividend even if it has had a difficult trading year and has made a loss! (How do you think this is possible and why might a business choose to do this?) Ordinary shareholders can vote on all of the issues raised at a general meeting of the company including:
The nominal value of a share is the issue value of the share - it is the value written on the share certificate that all shareholders will be given by the company in which they own shares. The market value of a share is the amount at which a share is being sold on the stock exchange and may be radically different from the nominal value. When they are issued, shares are usually sold for cash, at par and/or at a premium. Shares sold at par are sold for their nominal value only - so if a 10 pence share is sold at par, the company selling the share will receive 10 pence for every share it issues. If a share is sold at a premium, as many shares are these days, then the issue price will be the par value plus an additional premium. So if a 10 pence nominal value share is issued at £1, then the par value is 10 pence and the premium is £0.90 per share. The company issuing the shares will receive £1 for each share issued. Ordinary shares are the riskiest form of investment in a company since there may be no dividends paid and the market value of shares might fall after they have been bought. A very good example of the latter case relates to shares in Ryanair - take a look at this graph of their share price. 
Data source: Yahoo Finance The Ryanair share price fell so dramatically in mid-January 2004 because the company announced that its profits for the current financial year would probably be worse than they had previously expected. Marconi corporation plc suffered a similar fate in terms of its share price which suddenly collapsed following announcements of serious financial problems within the group. Take a look at how their share price has since recovered: 
Data source: Yahoo Finance Don't forget that the stock market is actually just a second hand share market so even though no company ever wants its share price to collapse in the ways that we have just seen, these share price catastrophes do not directly affect the business. However, with such a depressed share price, companies might find it vey difficult to raise additional finance or reassure existing creditors that they are a worthwhile risk. If you look at the share price pages in newspapers such as the Financial Times, The Times, The Guardian and so on, the prices you will see there are mainly ordinary share prices. The importance of share prices to a business is that it gives an indication of the value placed on the company by the market - for example if a company has 10 million shares and the current price is 500p each, then the value of the company - its market capitalisation - is £50 million. If the share price plummets to 200p the company would only be 'worth' £20 million. In such cases, companies become possible targets for takeovers! |
