If you are a first-time investor thinking of investing in stocks and shares but want to know more, then this article will guide you through the share capital terminology.
It will briefly cover what share capital is, the rights attached to shares; it will also explain IPOs, penny shares and the difference between stocks and shares.
What are shares?
Interestingly, the Companies Act is not particularly helpful (in layman’s terms) in defining what shares are. It states that shares are a “chose in action”, this means that a share is a legally enforceable right over something intangible. In other words, it confirms that a share is a piece of personal property.
Alternatively, a share is an interest in a company, measured by a sum of money which entitles the holder of that share to certain rights.
Shares are also referred to as equities or stocks.
What is share capital?
The share capital of a company is the number of shares issued multiplied by the nominal value of the share.
The nominal value is a value assigned to the share when it is legally created. So, you will see amounts like 1p, 10p, £1 and occasionally, seemingly random values like 1.7p (in the case of Kefi Minerals Plc).
Just to be clear: the nominal value is very different, in principle, to the share price (or market value). The latter is the price you pay to buy a share in a listed company through an online trading platform or stockbroker.
What is a share premium?
Each share created must have a fixed nominal (or face) value even if the issued (buying) price is different.
For example, shares may have an agreed nominal value of 10p but be issued to investors at £1. The difference of 90p is known as the share premium.
What rights are attached to shares?
A company may issue many different classes of shares, each with different rights regarding voting, dividends, and capital participation (what the shareholders will receive) on sale or winding-up of the company.
For example, holders of ordinary shares may enjoy voting rights and entitlement to dividends (if profits are available), whereas preference shares may not.
However, holders of preference shares may receive a fixed income for their shares (preferential dividend) and also rank ahead of ordinary shareholders for any capital distribution on winding-up. So, preference shareholders receive their capital investment back before ordinary shareholders.
In general, shares bought in companies listed on the Alternative Investment Market or the Main Market are usually ordinary shares, enjoying equal rights on voting, dividends and participation on winding-up,
However, investors should take care when subscribing for shares in equity crowd-funding ventures as it is not unusual for the founders or angel investors to have enhanced voting or participation rights compared to other shareholders.
What are stocks?
The words stocks and shares are often used interchangeably to describe an investor’s holding or interest in a listed company.
Stock is another way of describing a share; in the same way that shares are sometimes described as equities. Different terms used to describe the same thing.
Obviously, shares are traded on the stock market (the London Stock Exchange); shares are usually purchased through a stockbroker; and when shares in private companies are transferred from one shareholder to another, they are done so using a Stock Transfer form.
So, you can see how intertwined the two terms are, which can cause confusion, but in every day use, stocks and shares amount to the same thing.
Difference between stocks and shares
Essentially, there is no difference between stocks and shares. The Economist style guide (a reference point for journalists) provides a very helpful list of accounting, banking and finance terms used in American and British English.
Under British English we refer to “ordinary shares”; “preference shares” and “shareholders’ funds”; whereas, under American English the equivalent terms are “common stock”; “preferred stock” and “stockholders’ equity”.
So, two countries separated by a common language in their use of financial terms. We say shares, they say stock.
What is a penny share?
There is no formal definition for penny shares. For me, a penny share is any share than can be purchased on the stock market for less than ten pence; i.e. the share is priced to sell in single penny amounts and in some cases fractions of a penny.
Rightly or wrongly, penny shares tend to be associated with smaller, high-risk companies which can usually be found on the Alternative Investment Market (although sometimes on the Main Market). These companies are often referred to as “Minnows” or “Small-caps”.
What is an initial public offering?
An Initial Public Offering (or IPO) is the process by which shares are issued by a private company to retail and institutional investors for the first time. In exchange for their money, these investors receive equity capital in the newly listed company.
A private company is legally obliged to issue a prospectus before it can offer shares to members of the public.
Different classes of shares
To learn more about equities, including the different classes of shares used in raising equity finance, please click here.
