Companies

STOCKS AND SHARES

If you possess a large amount of money, what are the advantages and disadvantages of the following?

putting it under the mattress

buying a lottery ticket

taking it all to Las Vegas or Monte Carlo

putting it in a bank buying gold

buying a Van Gogh painting

investing in property or real estate

buying bonds

buying shares

Read the following text and answer the questions.

1 Why do people form limited companies? 2 Why do companies issue shares?

3 Why do people buy the shares?

COMPANIES

Individuals, and groups of people doing business as a partnership, have unlimited liability for debts, unless they form a limited company. If the business does badly and cannot pay its debts, any creditor can have it declared bankrupt. The unsuccessful business people may have to sell nearly all their possessions in order to pay their debts.

This is why most people doing business form limited companies. A limited company is a legal entity separate from its owners, and is only liable for the amount of capital that has been invested in it If a limited company goes bankrupt, it is wound up and its assets are liquidated (i.e. sold) to pay the debts. If the assets don't cover the liabilities or the debts, they remain unpaid. The creditors simply do not get all their money back.

Most companies begin as private limited companies. Their owners have to put up the capital themselves, or borrow from friends or a bank, perhaps a bank specializing in venture capital. The founders have to write a Memorandum of Association (GB) or a Certificate of Incorporation (US), which states the company's name, its purpose, its registered office or premises, and the amount of authorized share capital. They also write Articles of Association (GB) or Bylaws (US), which set out the duties of directors and the rights of shareholders (GB) or stockholders (US). They send these documents to the registrar of companies.

A successful, growing company can apply to a stock exchange to become a public limited company (GB) or a listed company (US). Newer and smaller companies usually join 'over-the-counter' markets, such as the Alternative Investment Market in London or Nasdaq in New York. Very successful businesses can apply to be quoted or listed (i.e. to have their shares traded) on major stock exchanges. Publicly quoted companies have to fulfil a large number of requirements, including sending their shareholders an independently-audited report every year, containing the year's trading results and a statement of their financial position.

The act of issuing shares (GB) or stocks (US) for the first time is known as floating a company (making a flotation). Companies generally use an investment bank to underwrite the issue, i.e. to guarantee to purchase all the securities at an agreed price on a certain day, if they cannot be sold to the public.

Companies wishing to raise more money for expansion can sometimes issue new shares, which are normally offered first to existing shareholders at less than their market price. This is known as a rights issue. Companies sometimes also choose to capitalize part of their profit, i.e. turn it into capital, by issuing new shares to shareholders instead of paying dividends. This is known as a bonus issue.

Buying a share gives its holder part of the ownership of a company. Shares generally entitle their owners to vote at a company's Annual General Meeting (GB) or Annual Meeting of Stockholders (US), and to receive a proportion of distributed profits in the form of a dividend - or to receive part of the company's residual value if it goes into liquidation. Shareholders can sell their shares on the secondary market at any time, but the market price of a share - the price quoted at any given time on the stock exchange, which reflects (more or less) how well or badly the company is doing - may differ radically from its nominal value.