Debitoor Dictionary

Accounting terms explained in a simple way

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  1. Dividends
  2. Shareholder
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Share - what is a share?

A share (or shares) is issued by a company as a way to raise money for future development and reinvestment into the company, or for the owners benefit.

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If the company pays dividends, then those who hold the stocks (known as shareholders) get some of these future profits.

Before we go any further, it is important to clarify the difference between the terms "share" and "stock". Put simply - a stock is money raised by the company via issuing shares, and a share is one unit of stock. Generally speaking, however, these terms are used interchangeably and for all intents and purposes mean the same thing.

Different types of shares

There are a few different types of shares that companies can issue, either relating to who can buy them, or what shares mean for those who buy them. To make things a bit more straightforward, we'll take them two at a time:

Restricted shares

Restricted shares are shares that are set aside, not available for the public to buy. Instead, employees are given an opportunity to buy these shares if they wish. In some cases, an employee salary might be made up of a normal salary plus a percentage of shares (common with start-ups). If the company is feeling generous, they may also decide to match employee share purchases (e.g. an employee buys 4 shares, the company will add 4 shares for a total of 8).

Float shares

"Float" shares are the amount of shares available to the public for purchase on the stock market. Shares are purchased via a shares account opened with a banking institution. Any money placed into the account can be used to buy shares- and any money made from the shares will be paid to this account.

These two types of shares lead us onto an important distinction on the terms certain shares hold:

Ordinary shares (common)

Ordinary shares are the most common (hence also being known as "common shares"), where the dividends paid to shareholders are scaled (if the company makes a bigger profit than expected, then the dividend paid is bigger and visa versa).

Ordinary shares also carry voting rights, depending on how many shares are owned by each person. Voting rights are having a say in the direction that the company takes in the future (assuming a shareholder owns a big enough percentage).

Preferred shares

In contrast to ordinary shares, preferred shares carry no voting rights and have fixed dividend amounts. This means that these fixed dividends must be paid before ordinary shareholders dividends are paid out.

Company shares: an example

John Smith owns a company and all 1,000 shares (for the sake of simplicity). He then decides he'd like to issue some shares to be sold, settling on 30% of the company. This works out to 300 shares. What this now means is that John owns 70% of the company (shares), and will only receive 70% of future profits paid via dividends.

This 30% once sold gives John a chunk of cash he can then use to carry on expanding his business (or he can keep it for himself if he prefers). The shares would be considered a tangible and current asset, and the cash from the shares an asset.

On the opposite side of the coin, someone who bought some of 300 shares will receive profits from dividends. However, if the share price increases from £10 to £20, then they could be sold, making a 50% profit. Money made from share price increases are referred to as a capital gain, and as a result, Capital Gains Tax would be paid on the amount.

How does this all factor in when picking which stocks/shares to buy?

Ultimately, it's up to you. Depending on how well a company does (or is expected to do), you might pick based on the dividends they are likely to pay (especially if they are scaled/proportional).

It has been debated that dividend amount doesn't really factor in so much because shareholders (who already own the stock) can just buy or sell more stock until they've reached a point where they are happy with the ratio of their cash dividend.

In most cases, it is more likely that you'll pick based on the current share price, aware that it could increase substantially, meaning there is a bigger profit in selling them in the future when you feel the time is right.