We can now return to the question posed in the title of this chapter: “What is a share?” To understand what a share is, we must first have some understanding of how a company is organised. A ‘company’ is created when two or more like-minded people get together to create an entity which is separated from them and independent of them in order to conduct some business. In order to run any sort of business, it needs various types of assets, land, buildings, machines, stocks and others. To pay for these assets, it needs its own capital or cash, if you like to use a layman’s term. The capital can be obtained from three sources:
(1) From shareholders -this is known as new equity capital.
(2) From borrowing this is known as debt capital.
(3) From its own profit which is not distributed to its shareholders- this is known as retained earnings.
However, at the time of a company’s creation, its only source of cash is from equity capital which is obtained from its original progenitors. Once the company has its own money, it may be able to augment its equity capital by borrowing more money from lenders. On the completion of this step, we have passed the first stage of the organisation of a company. With that money, it can then purchase the required assets which in turn will be used to generate the business pl the company. The original progenitors of the company are its original shareholders. In return for their money, the shareholders are provided with share certificates in proportion to the amount of money the» each invested in the company (this money is known as the paid-up capital of the company). In Malaysia/Singapore, the usual value of a share is $ 1, therefore the number of shares issued would be the same as the initial paid-up capital of the company in dollar terms. The number of shares each investor holds out of the total number of shares issued determines the percentage of the company he owns. If a company has issued 10 million shares and Mr A has 1 million shares, he is the rightful owner of 10 per cent of the company.
if all goes according to plan, the business will be profitable and the mummy therefore has surplus money from its business. The surplus arising from the business can either be paid back to the people who supplied the equity capital in the first place or be used to re-invest in the business for the purchase of more assets. From this point, the company has become self-sustaining and it no longer needs any more equity capital from its shareholders.
Earlier, it is said that a company is usually started by two or more people in the form of its original shareholders. However, the ownership of the company is not necessarily limited to these people. The original shareholders do not have to hold on to their shares forever. If they so wish, they can sell a part or all of their shareholdings to other people. This is how most smaller investors come to own shares in large publicly listed companies. Their shares have been sold to them by the original investors of the companies.
But the number of shares in the company is not restricted to the original number. The paid-up capital of the company can be increased hum time to time by means of Rights issues or Bonus Issues or New Issues in connection with the acquisition of other assets or companies. (These terms will be explained later in the book). The original owners of the shares in the company do not necessarily take part in the new issues of equity capital. In the case of the earlier example, the company could issue 10 million more shares in exchange for taking over another company. In which case, the paid up capital of the company would how be 20 million shares and Mr A’s ownership of the company would how be 5 per cent (1 million out of 20). The. value of Mr A’s holding would be 5 per cent of the total value of the company.
What then are the benefits of buying shares in a company?