STOCKS AND SHARES
| ‘TWO'S COMPANY . . .’ In order to understand what stocks and shares are, it is helpful to know what a company is. A company is a business that is owned by more than one person and it has special rights and protection by law – in return for obeying certain rules. Once a business has legally become a company, the people who own it are no longer personally responsible for any debts, complaints, or claims against it. If the business goes bust – owing money to others – the owners only lose what they invested – or put into it. The creditors – people who are owed money by the company – cannot take away the owners' personal possessions in place of payment by the company, they can only share what is left of the liquidated assets – the money got from selling off whatever belonged to the company. This protection is called limited liability – without it, many businesses would not get started. There are many reasons why a business can fail and it is not always the fault of the people who run it. For the same reasons, people should not invest any more money than they can afford to lose! |
PROS AND CONS More often than not, the creditors get less than they are owed. This may not seem fair, but it would be equally unfair if people lost their homes and all their possessions because of something they could do nothing about. On the other hand, the rules for companies are very strict and the responsibilities clearly defined. You cannot ‘close’ your company without warning and you must publish information about how much money your business has. These rules help businesses to trade with each other. Companies will let other companies buy much larger amounts of goods and let them pay much later than an individual or ‘non-company’ small business. Most businesses want to become companies because banks are company businesses too, and they would rather deal with and lend money to other companies rather than to individuals or small partnerships. |
All businesses need money to get started and borrowing from a bank is the usual way of going about it. This starting-up money is called ‘capital’ because it is at the head or the first thing you need when you go into business. HOW IT ALL BEGAN But if you own a company, you can also raise capital from selling parts of it instead of borrowing from a bank. A part – or a share of the ownership – of the company can be sold to others in return for cash. The business of buying and selling shares, as we know it, only began about 300 years ago when European merchants – rather like Shakespear's Antonio in Venice – wanted to expand their trade with the newly-discovered countries in Africa, America, and the Far East. They knew that big profits could be made by simply going and getting the silks, spices, tobacco, and ivory, because of the high demand for them at home. But buying a seaworthy ship, feeding a crew, and taking enough gold and goods to exchange was very expensive. So, to finance the voyage, the merchants needed to raise a lot of money. If the banks wouldn't lend them enough – shipping was, and still is, a risky business – they could raise more capital from investors, usually friends or acquaintances. Investors would lend money in return for bond certificates – pieces of paper saying how much they had put in, what interest they would get, and even a date when they would be paid back. These IOUs became known as ‘stock.’ HOW IT DEVELOPED In the late Seventeenth Century, all sorts of companies were formed to raise capital for business ventures by issuing ‘certificates’ in return for money. A company would offer a large number, or stock of these certificates at a single time and perhaps hundreds of people would buy them. That way, a much larger number of people could invest – or put in money – than one or two banks, who were always worried about taking too much risk on their own. Even today, these bits of paper – or certificates – issued by companies and governments alike – are still referred to as stocks. This is also how the place where they are bought and sold became known as the stock exchange. It was soon discovered however, that it was much better to sell shares – or part-ownership – in the company rather than repay stocks in full for one particular venture. When the voyage was over and the profit made, each shareholder got a small part of the profit – the dividend – in proportion to the size of their individual share. The rest of the profit would be kept by the company to help pay off the bankers and finance the next voyage. HOW IT IS TODAY Nowadays, once a company is formed, a board of directors is appointed – usually shareholders themselves – to decide future policy and report to any other shareholders, while the management concerns itself with the day-to-day running of the business. Ordinary or A shareholders can come together and vote on company polity at an Annual General Meeting, or at special extraordinary meetings if a merger or a takeover is in the offing. |
If even more capital is needed to finance expansion or the takeover of another company, special issues of B or non-voting shares can be floated on the stock exchange. |
