What is a Share?

Say, Tony wants to start a Bank, but no money to start. He can form a Public Limited Company. This is because capital can be collected from public in this structure.

You can identify a Public Limited company, from the business name itself. If the name of the business ends with the word ‘Limited’ or ‘Ltd’, they are public limited companies.

Tony will work out the capital required to start and run the business. Say $1,000,000. He is close with/related to a politician and is sure to get the licence to start a Bank.

He will divide the required capital $1,000,000 by (any number) number of shares he wants to have in the company, say 1,000,000.

The result is $1. This is the value per share. This company will have 1,000,000 shares of $ 1 each.

If he divides the required capital $1,000,000 by 500,000 the result will be $2.

Each share value is $2. There will be 500,000 shares.

 

Tony has decided $1 per share and 1,000,000 shares.

He has to find 6 more people to join the business idea as ‘directors’. The law requires 7 people to join to start a company like this.

These 7 people should take up at least one share, by paying $1 in the company's bank account.

They named the business as ABC Bank Ltd.

The remaining share (1,000,000 minus 7 shares taken by Tony and friends) can be offered to public.

This is called IPO (initial public offer). Anyone can buy the share of $1 and can apply for any number of shares.

There are 'Share registries' or 'Brokers in Stock exchanges' available to sell these shares to public. So he collects $1,000,000 by selling all those shares.

The shareholders shares are entitled to;

(1) dividend, in case the directors declared to pay dividend &

(2) right to one vote per share held. They can cast the vote in the meetings, held once a year, to appointing the directors, auditors and approving the financial reports.

The first set of directors for the company will be the 7 that formed (Tony + 6 of his friends/relatives). After 5 years a third of the directors will start retiring by rotation.

Dividend:

Tony is a very successful person. His bank earned good profit, after paying all salaries (including his salary) and meeting expenses and paying 30% income tax from the company's money, he found net profit of $100,000.

He can divide the $100,000 by the 1,000,000 shares and so he can pay 0.10cents per share as divided on each share to the shareholders.