Businesses registering as limited companies through the Companies House are often confronted with questions about company shares and their assigned value. These questions can be very confusing and intimidating if the business owner doesn’t have prior knowledge of the concept of company shares. They are a necessary part of the entire company registration process but are not confusing as they might seem. We’ve broken these terms into simple definitions so that they are easier for you to understand.
What are company shares?
A share is a percentage of ownership in a limited company. Each share represents a piece of a limited company by share. The more number of shares an individual holds, the higher percentage of company ownership the concerned individual has. Individuals receive a certain amount of the trading profit in percentage corresponding to the number of shares they own.
It is mandatory for limited companies to issue at least one share. However, there is no upper limit to the number of shares that can be issued. Shares can be issued during the incorporation process or even after a company has been set up. There are different types of shares that companies can issue. For instance, most companies issue the “ordinary” shares that have equal value, i.e. every buyer has same voting and profit rights. On the other hand, some companies issue multiple classes and types of shares that offer different voting and profit rights to different members. Some examples of such shares are alphabet shares, management shares and deferred ordinary shares.
Who are shareholders?
Anyone who buys and owns a share in a limited company is known as a shareholder. Every shareholder, with the purchase of a company share, becomes legally entitled to a have say in any important corporate decisions related to that share (voting rights). They also become entitled to a certain percentage of the profits related to the number and value of the shares they own. Shareholders, in market lingo, are referred to as “members”. The first members of a company are usually the people who set up the company, and they are also known as “subscribers”. This is because their names are subscribed in the Memorandum of Association for the purpose of forming the company.
Any individual or corporate body (firm, company or organisation) can be a shareholder in a limited company. The Companies House mandates that a business should have a minimum of one shareholder to become registered as a limited company. The company may have many shareholders; there isn’t an upper limit to it. For small companies, it is common to find that the director is also a shareholder, with one person assuming the role of director as well as shareholder. Shareholders aren’t accountable for the everyday activities of a business, unless they are also the directors of the company.
What is share value?
Each company share has a nominal value and a market value. The nominal value is called the “booking value” and is assigned at the time of stock issuance. It is the value paid by a member or agreed to be paid by a member for buying a company share. Nominal values are issued arbitrarily to the company shares, and the funds raised from these shares are invested directly into the company as a means of infusing cash into the business. The nominal value of a share also represents an amount that the company owes to the shareholder at a later date. For shareholders, the nominal value of the shares they own is the amount they are liable to pay towards the business’ debts.
As soon as a company’s shares are issued, the market is open to trade and invest in the company. The shares open with a nominal value, but the stock market changes every day, causing the nominal value to either increase or decrease. This real value at which a share can be readily bought or sold in the current market is called the market value of the share. Market value is also referred to as the “going price” of a share or stock.
A share’s market value is impacted by not just the company performance but also by external factors such as the state of the global and local economy.
What is share capital?
Share capital is the amount invested by shareholders in a limited company for business use. It is the amount of capital raised by a limited company by means of issuing shares. Shared capital is also called the owned capital. In reality, it is the capital invested by shareholders, and since shareholders are percentage owners in the company, share capital is called the company’s owned capital. This capital remains in the possession of the company until it is liquidated. Share capital is the most reliable source of capital for joint stock firms. It increases the company’s credit worthiness and even delivers the required capital.
Businesses can increase the total sum of the share capital by making changes to the capital clause of their company shares. Share capital doesn’t create any charges on the company’s assets. In fact, it gives shareholders a chance to participate and contribute in a company’s management practices and decisions. Shareholders also receive the benefit of bonus shares while bearing the limited liability. The liability of shareholders in a company’s business is limited to the face value of the shares they own.
There are different types of share capital:
- Authorised capital: Maximum capital that a company is allowed to raise by selling its shares to the public
- Issued capital: Part of authorised capital issued to the public
- Unissued capital: Part of authorised capital not issued to the public
- Subscribed capital: Part of issued capital subscribed by the public
- Unsubscribed capital: Part of issued capital not subscribed by the public
- Called up capital: Part of subscribed capital called up by company
- Uncalled up capital: Part of subscribed capital not yet called up by company
- Reserve capital: Part of uncalled capital kept as reserve to be called up during liquidation or winding up
- Paid up capital: Part of called up capital already paid by shareholders
- Unpaid up capital: Part of called up capital not yet paid by shareholders
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