Shares are financial assets or a quantitative measure of company ownership. Some companies use shares as a distribution of residual profits in dividends.
Shareholders, who do not pay dividends, do not participate in the profit distribution, but they participate in share price increase, when company profit rises.
Shares represent the owning of the company capital part. Shares can be common (shares) and preferred (stock), but people use them alternatively.
Company owners can decide which kind of shares (common or preferred) they would like to issue for investors to get funds for business startup, development and operation.
Credits, bonds, and stocks are forms of debt capital, but only equity capital has no legal obligation to be returned to investors. Stocks can earn income in dividends, but they do not earn interest. Almost all companies, from partnerships or LLCs to the largest corporations, issue shares of some type.
Private company founders or partners own its shares. Growing companies can sell shares outside to investors in the primary market. First investors can be family members and friends, then they can be angel and venture capital (VC) investors. After some growth, companies can sell shares to the public through an initial public offering (IPO). Then, they can take place in a stock exchange and be publicly traded.
Common shares are more popular among most companies, because they give residual claims on the company and its profit. It gives the opportunity of potential growth for investments by dividends and capital rise. Capital shares give shareholders the control over the business, because of voting rights allowing to vote in board of directors, on company actions, to make decisions about issuing of new securities or paying dividends. Moreover, some common shares are preemptive in purchasing new shares and keeping ownership interest after new shares issuing.
Preferred shares don’t give voting control or big market growth, but regular dividends and set payment characteristics. They are less risky due to the priority of getting payment before common shares, if the company becomes bankrupt. The bankruptcy status makes companies to pay lenders their money back in an order: bondholders, preferred shareholders, common shareholders.
Securities and Exchange Commission (SEC) controls share issuing and distribution in public and private markets. The SEC and Financial Industry Regulatory Authority (FINRA) regulate it on the secondary market. Nowadays, electronic shares have replaced paper certificate ones.
Important note: Shares are agreements between company and shareholder to give assets to shareholders after covering obligations and debts of the business.
Authorized and issued Shares
Board of directors determines a number of shares to issue. These shares are authorized. Shareholders own issued shares, which give the right of ownership.
The number of authorized shares influences shareholders' ownership, so shareholders can limit the number of authorized shares in the meeting. They discuss and make a decision about increasing the number of shares. In case of accepting the increasing of authorized share number, the application to the government is requested by correcting the articles of amendment.