Shares of companies: theoretical principles
I think everyone, even the novice investor, has a general idea of what stocks are. But as soon as it comes to real purchase of the stock, the misunderstandings begin. Someone believes that it is possible to buy 10 shares as the market and put them under the pillow (and the word “depositary” is unknown). Someone doesn’t know the difference between preferred shares and ordinary, someone first hears about taxation and individual investment accounts. This article reveals the maximum of the essence of the shares and their types.
The value of the shares of Russian companies and the rights of owners of shares
Share — a security which is actually forming the statutory fund of the company. If the company is registered as a joint-stock company, it is in the process of issue (issue of shares). The whole of the prospectus may be divided between the owners of the company (the shares shall be determined individually), and can be released into free circulation on the stock exchange. Depending on the type of shares, their owner may somehow have access to the management.
The nominal value of all issued shares — the authorized capital of the company. The value of the shares of Russian companies is based on financial reports, the participation of speculative capital, the amount of dividends to be paid. Shares can be:
ordinary (simple). Allow to vote at the shareholders meeting, does not guarantee the right to receive dividends (to pay dividends or not resolved by the meeting). Common stock holders have the right to priority redemption of the additional emission;
preferred shares. Do not give the right to vote until such time as the shareholders meeting has not suspended the payment of dividends. If the “prefs” decision not to pay dividends, the shares become “voting” and lose the right to vote with the first payment of dividends. The law may not constitute more than 25% of the total share capital (talking about the nominal value).
In practice things are more complicated. Those who own a small stake, find themselves in a very uncomfortable position. A vivid example is the privatization of “Bashneft” and “Rosneft”. Once at the beginning of October a decision was made to purchase “Bashneft”, “Rosneft”, the shares of “Bashneft” has grown a little bit, but then the question arose: what is the fate of a minority stake? Rosneft, which was not interested in minority stake, originally made the proposal, which did not satisfy the minority shareholders, after which the price abruptly collapsed. The shareholders found the consensus, traders still had to worry a bit.
What is the cost of the Russian companies above is a rhetorical question. On the one hand, the ability to receive dividends would make the preference shares more profitable (this is true for U.S. exchanges). In fact, regular stocks are more expensive. Why? Clear explanation there, but it’s definitely not only in economic reasons, but in the legislative.
Preference shares are divided into:
- cumulative – dividends on such shares in the event of non-payment are saved;
- non-cumulative — no compensation of unpaid dividends;
- convertible — can be replaced with a common share in a certain proportion;
- equity — if dividends on the ordinary shares are above, an additional increase for dividends of preferred is possible.
The types of block of shares:
- 1-25% — minority;
- 25%+1 share — 50% — blocking;
- 50%+1 share — control.
Shareholder rights in accordance with the amount of shares:
- up to 1% is allowed to vote at the meeting within its share of the securities;
- 1% — obtaining information about the shareholders, may be useful in developing strategies;
- 2% — the right to propose to the governing bodies meetings, to bring issues to the agenda of the meeting;
- 10% — the right to convene an extraordinary meeting;
- 20% — the opportunity to participate in strategic decision-making;
- 25%+1 share — locking solutions in matters of reorganization of the company, changes in bylaws, etc.;
- 50%+1 share — the possibility of sole decision-making on issue of shares payment of dividends;
- 75%+1 share — sole management of the company.
In case of reorganization of the company, the owner of the package more than 50% have to offer minority shareholders to purchase their package (offer, first right). The owner of 95% of the securities entitled to redeem the remaining shares compulsorily. The value of the shares of Russian companies depends on what package and who owned.
The value of Russian stocks:
- the nominal price, which forms authorized capital;
- equity — the initial price to which is added the emission revenues (commission allowance);
- market price determined by the market (buyers and sellers);
- balance — net assets of the issuer divided by the number of shares traded on the market.
If the stock price generated by the market is lower than the carrying amount, a security is considered undervalued.
The procedure for the emission of shares:
- the need of issue is discussed and adopted by the shareholders;
- approval of the decision;
- registration of emission in public services (all issues of shares and bonds of companies is in the public domain!);
- the placement of shares;
- state registration of the report on the last emission;
- amendments to the charter.
Buying shares through a broker schematically shown in the figure:
The procedure for purchase of shares from individuals:
- the seller provides an extract from the shareholders register confirming the fact that the shares do belong to him;
- a contract of purchase and sale is prepared by notary (the notary is needed at least in order to verify the compliance of the clauses of the contract law);
- the buyer is registered with a registrar — and only at this point, the right to acquisition passes to the buyer;
- at the time of entry in the register issued a transfer order signed by the seller;
- in the register of shareholders of the Issuer by the purchaser opens the account where account will be taken of purchased paper.
The value of the shares of Russian companies is constantly changing, because the purchase of shares from individuals, appropriate only from the point of view of long-term investments. Buying shares through a broker speeds up the process through direct access of broker on the stock market. Two contracts are issued with the broker:
- about the execution of the order of the investor in the purchase and sale of shares;
- processing and accounting of shares purchased in favor of the client.
If you have any questions, we will try to answer them! In the next article we will tell you more about the practical aspects of purchase of shares.