Public companies initially raise capital through the issue of shares. The stock market provides a primary market where companies requiring capital issue shares to investors wishing to invest their capital efficiently, and a secondary market where investors are able to trade listed shares and other securities.
Shareholders accept the risks and responsibilities of ownership and are granted certain entitlements in return.
- To share in the company’s profits in the form of dividends;
- To participate in rights and bonus issues;
- To vote at company meetings;
- To share in the company’s growth as reflected in changes in the share price;
- To be kept informed about the company.
The market price of a company’s share is determined by supply and demand from buyers and sellers i.e. market forces, which is influenced in part by the expectations for the future company profits, share price and dividends. Shares may be purchased and sold on a stock exchange through a stockbroker. Minimum transaction amounts may apply and details are available from a stockbroker. With all share transactions now being processed electronically investors will have either a company issuer sponsor holding statement or electronic sub-register system (CHESS) holding statement detailing the opening balance, all transactions and the closing balance for the month a transaction occurs. A stockbroker can act as a CHESS sponsor and electronically register purchases and sales by reference to the investor’s Holder Identification Number (HIN). It is possible to have issuer-sponsored shares which are recorded on the company’s own sub-register using a Security-holder Reference Number (SRN).
Many financial institutions offer discount brokerage services by investors placing their transactions online. In these situations advice is not usually provided. It is also possible to transfer shares directly from one party to another. This is known as an ‘off-market transfer’ and can be done through the company’s share registry. It is also possible to transfer shares directly from one party to another. This is known as an ‘off-market transfer’ and can be done through the company’s share register.
When purchasing shares in a company for the first time investors must acquire at least one marketable parcel as defined in the Australian Securities Exchange (ASX) Business Rules. The minimum marketable parcel in any one company is currently $500. After the initial purchase investors can buy or sell any additional amount they wish. Stockbrokers may set higher minimum transaction limits or charge higher fees for transactions that do not meet their minimum transaction or trade value.
There are different types of shares. Other types of shares are variations of Ordinary Shares and include Preference Shares, Contributing Shares, Bonus Shares and Rights Issues. All have different rights, liabilities and obligations that should be fully understood prior to purchasing. Ordinary shares are the most common shares.
Preference shares may be redeemable or convertible. They give the investor the right to a fixed or higher dividend not related to company profits and are paid before the dividends to ordinary shareholders. Holders of Preference shares do not have the same voting rights as ordinary shareholders. While having the right to this special dividend, the company is not obliged to pay the dividend at a specific time, but where it is not paid in a particular year it may accumulate and be paid in a subsequent year. In the event of the liquidation of the company, Preference shareholders are usually entitled to be repaid their capital before Ordinary shareholders but after creditors. At a specified date the capital may be redeemed or converted to Ordinary shares, as applicable.
With Contributing (or partly paid) shares, dividends are paid in proportion to the paid up amount. Further contribution will be required in the future for the shareholder to fully own the share and become an Ordinary shareholder. It is a way that investors can pay off share acquisitions over time. Bonus issues of shares are new shares issued to existing shareholders in proportion to their existing holding at no cost. This does not change the proportion of the company they own. In fact the value of the shares may initially fall and the dividend per share may reduce. However as the price of the shares rise and dividends increase they will receive their benefit. They are sometimes described as a cashless dividend because at the time of issue the shareholder does not receive a cash payment.
A Rights Issue is made when a company wants to raise more capital and an offer is made to shareholders to purchase extra shares. They have no obligation to take up the offer. There are Renounceable and Nonrenounceable Right Issues. Renounceable issues can be traded and as a result if an existing shareholder does not wish to purchase the shares they can still profit by trading them. Non-renounceable shares cannot be traded and if they are not taken up they are of no value to the shareholder.
Shares are complex and professional advice should be sought before investing. Even the most researched and best-intended advice may result in a loss.