Shares

Definition

Equity securities issued by joint stock companies and by which the owner acquires ownership of the equity of the issuer of shares. It provides its legimitate shareholder with significant tangible or intangible rights:

  • rightto receive a certain level of profit (dividends) of a joint-stock company,
  • entitled to the assets of a joint-stock company in the event of bankruptcy, 
  • control right which comprises voting right and the right to manage a joint-stock company,
  • pre-emptive right in the event of new share issue,
  • right to have insight into basic operating results of a joint-stock company
  • right to transfer shares i.e. free sale of such shares.

 

Joint-stock company as a corporation is founded by the first –founding share issue, whereas any subsequent share issue aim at increasing shareholder's capital of the company, i.e. realisation of its share capital increase.

These securities are located in temporary account of the owners at the Central Securities Depository and in order to enable the owner to realise its rights arising therefrom, they are transferred by means of the broker or authorised bank to the owners' accounts with the Central Securities Depository. The securities are dematerialised meaning they are issued, transferred and recorded in the form of electronic encription in the information system of the Central Securities,in line with the regulations of that instutition.

Shares can be original shares (first issue of shares) and new shares (subsequent issues) issued for the puprose of share capital increase of a joint-stock company.

Generated return of equity is paid dividend and generated capital gains due to the growth of the market price (exchange rate) of share.

There are two basic types of shares:

  • Ordinary shares
  • Preference shares (preferred stock or preferrential share).

 

Ordinary sharesmaintainownership position in the company, provide its owners with the right of control and payment of income after the settlement of obligations to the owners of bonds and preference shares. Similar treatment is in the event of bankruptcy or liquidation of the company. The existence of several classes of ordinary shares implies that there are differences among them in terms of the voting right, and control right, automatically, but also yield and risk.

Preference sharesare also reflected in having a part of possession of a joint stock company, only what differentiates them is that their owners do not have voting rights. In return, preferred stock shareholders are guaranteed a fixed dividend and have a preferential treatment with regard to its payment. In addition, preferred stock shareholders have a priority with regard to the fulfillment of obligations in the event of a company bankruptcy or liquidation of a joint stock company.

Preference sharescan be divided according to the criterion of dividend payment into:

  • Cumulative preferred, for which all skipped dividends from the previous years are cumulated and must be paid prior to the payment of any dividend to ordinary stock shareholders.
  • Non-cumulative preferred, where a joint stock company is not obliged to cumulate unpaid dividends from the previous years but there is an obligation of priority over ordinary stock shareholders with reference to payment of dividend. They can be both interchangeable or convertible, giving their shareholders a possibility to convert them into ordinary shares on fixed or relatively favourable terms.

 

Par Value (Price)of a Share

The par value of a shareis the amount assigned to a share.

In the course of foundation of a joint stock company, issued price of the first issued (founder's) shares, in principle, corresponds to their par value.

 

Book Value of Shares

The value of a share that is determined by reducing total assets by the amount of loss over capital and the amount of long-term provisions and liabilities, as well as the amount of deferred tax liabilities (if not included in the amount of long-term provisions and liabilities), and then divided by total number of shares of the issuer;

This valued is especially important because it most often represents the initial price of first share trading on stock exchange.

 

Issue Rate

First issue of shares is, in principle, placed at the exchange rate which is equal to their par value (nominal exchange rate), whereas share of subsequent issues are placed at issue ratewhich is, in principle, above or below par value.

Issue rate of new shares is determined on the basis of the exchange rate of shares of the previous issue.

 

Market Price of Shares

The stock exchange rateor market price of shares is a pecuniary amount at which other and any further share tradingon secondary financial market is realised through a relation of demand and supply.

Anything that happens with the stock exchange rate of shares on the financial market from the moment of issue (the end of the placement) to the end of the company life span implies its movement on the secondary market for securities.

Issue rate of shares on primary market is basis on which shares start living on the secondary market.

Issue rate at which shares enter secondary market is the initial one.

 

Preference Shares

 

  • Bring regular fixed dividends
  • The exchange rate of preference share- A, where A= D/k, D- dividend, k- rate of return on equity