Wednesday, February 9, 2011

Simplifying Shares (End of Chapter 1 )

1(e) Simplifying Shares

Shares are units that make up a company .Think of these as cells of a body,a corporate body .The major difference is that shares are numbered . A company is the legal vehicle you use to deliver your idea/solution to the consumer and in return, earn financial rewards through it. As you may have heard of Public companies or Private limited companies or Limited Liabilty companies -all these descriptions represent various legal vehicles with the major difference being in the share structures .

When people with an interest in a company are said to own shares in a company ,it means that they exchanged shares for money.The money they used to buy the shares is used as capital and it is known as share capital .The owners of shares ( those who exchanged money for the shares) become known as shareholders.Share holders are in actual fact the true owners of the companies .Shareholders appoint directors,directors employ managers ,and managers oversee workers .This is the hierarchy structure of companies .This formation appears in a business plan under the heading Organisation Structure .

Private companies And Public Companies .
Private companies are simply legal entities whose shares are owned privately. This means that the owners have no obligation to reveal the financial perfomance to anyone except to other private owners and tax authorities.Where a private company makes profits the dividend ( amount from the profits available to shareholders ) are paid out to the private owners . In some cases, the identity of shareholders in private companies is unkown to the public.

Public companies on the other hand are companies which are partly owned by the public.The founders of the company can still hold a controlling interest (majority shareholding) and release the rest of the company shares to the public. Company shares become available to the public through an Initial Public offer (IPO) .This happens when a previously private company intends to convert into a public compoany .The other turn of phrase to describe the process of going public is " listing" or " floating shares ".

The Process of Going Public ( Converting from Private Company to Public Company)
Stock Exchange Authorities have a series of requirements for companies that intend to go public. These companies must meet those requirements and must disclose certain information about the companies officers ,the company's compliance to Financial regulations such as Tax returns and its operations. All financial and operational information of public companies must be made public.This ranges from what qualifications and experience the company directors have , how much the directors are paid ,how many shares they hold in their capacities ,and the company's business and future plans .

A stock exchange or stockmarket is where public companies' shares are traded. To simplify this defination, it is basically known that a market is where goods and services are exchanged for money-where the buyer and seller meet . A stock market is where public companies shares are exchanged for money .Stockmarkets are where share owners or holders of buy and sell their shares through intermediateries called Stock Brokers. In basic economics the price of any commodity is determined by forces of demand and supply and where these two forces meet is where the price is determined this point is called the equilibrium . For instance, if there is flooding and the supply of potatoes is reduced and potaoes become scarce ,their price goes up because there is higher the demand for potatoes as compared to low supply of potatoes.

 Now,lets say the flooding causes a bumper harvest of potatoes such that there is far too many potatoes to the point that they are even going bad because of low demand from buyers -the price of potatoes will fall so that buyers can buy them before they go bad on the seller .
We must also remember that there other factors that can affect the deamnd and supply of potatoes such as cost of transport, cost of agricultural imputs ,wages flactuations of potato farm workers ,effeciencies of farming systems (use of mechanised methods to improve output and quality,etc .The point here is there are many factors that can ultimately cause the price of potatoes as a commodity to move up or down.

The same principle operates on the stock market -where more people demand the shares(also known as equity) of a certain company, the price of the shares rises .Where more share holders/owners are selling their shares compared to those buying them, the price of the shares will drop. Certain factors can also affect the prices of shares besides demand and supply ,these can be information and perception of value of the company.

The Stock exchange or stock market is also referred to a Capital Market because it is where companies raise capital by going public. It is at the point of going public or listing that an entreprenuer makes genuine money and it is at this same point other investors exit a company ( most venture financiers exit here) . The point of going public is considered the ultimate measure of an entreprenuers success.It should be the goal of every entrepenuer who thinks big to take his company public.

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