Compare, Select & Save on health cover with iSelect

An Introduction To Company Shares

By Sandy Naidu | January 22, 2008

Every company needs funds for future growth. It can raise these funds in one of the three ways:

  • By Borrowing - This is the money that is borrowed from banks, private investors or other financial institutions. The money has to be repaid fully over a period of time. The lenders charge the company interest for lending the money.


  • Private Equity - This is where the company sells a certain percentage of ownership to a private investor. The private investor purchases the ownership for a mutually agreed upon price. The private investor becomes a part owner of the company - a shareholder of the company.
  • Public Equity - This is where the company raises funds by ‘going public’. A share is part ownership of the company. When a company offers its shares to general public it does this by listing itself on the stock exchange. This process of getting listed on the stock exchange is called ‘going public’. Anyone can buy the shares of a company. When you buy a share you become a shareholder of the company. A shareholder can also sell their shares to other investors in the open market (the open market here is the stock exchange).

The shares of a listed company can be bought either by big financial players (like banks or financial institutions) or by general public. The general public (investors like you and me) are also called mum and dad investors.

The company’s directors are answerable to the shareholders about the company’s profits and losses. At the end of the financial year, the company holds an annual general meeting. All the shareholders are invited to this meeting. In the meeting the directors talk about the future direction of the company, the reasons for the profits or losses etc. If a company makes a profit then they give the shareholders a certain portion of their profits. This is called dividends.

The shares in a company move up and down based on three factors:

  • The company’s fundamental values - how strong the company is financially and the future prospects of the company.
  • The general market movement - If there is some news which might affect the economy as a whole then this might affect the shares.
  • The industry specific factors - How the industry to which the company belongs to is performing and the future prospects of that industry.

You can buy shares in a company in one of the two ways:

  • At the time of listing - When company decides to go public it appoints a few stock broking companies. These stock broking companies issue a prospectus of the company to the interested public. You need to get in touch with one of these brokers and apply for shares in the company. You might not always get the shares you applied for. In some cases you might not get any shares at all. It all depends on the demand for the shares in that company. If there is a lot of interest and too many applications for shares (more that whats on offer) then the shares are said to be oversubscribed. This is good news for the company. If there is less interest and the number of applications are less than whats on offer by the company then the shares are said to be under subscribed. This is bad news for the company because it has not obtained the funds it came to the market for.


  • You can also buy the shares after the company has listed on the stock exchange. To do this you can approach any stock broker that trades shares in that stock market. When you buy shares in the open market then you have to do your research and try to pick the right stocks at the right time. And volumes and volumes can be written about this research….

Related Posts:

Topics: Shares |

Comments

« Don’t Put All Your Eggs In One Basket | Home | Australian Stock Exchange »