What are Shares?
A share in a company gives the investor, most importantly, a share in its dividend which is declared once or twice a year. Also a stake in the company's assets and property and a vote, proportional to the size of the investor's holding, in the company's business at its annual general meeting (AGM).
The assets of the company comprise its cash-in-hand, property (land, buildings, fittings) and the company's stock of raw materials and work-in-hand, less its liabilities in the form of borrowings or payments to creditors.
Nominal Share Value
Most shares have a nominal value (typically 25p, but often more or less), which originally represented the asset value of the company. The shares were once sold at a market value which represented both the worth of the assets and their ability to make money. A 25p nominal share might once have been sold for one pound, reflecting the earnings potential of the company. The total of the nominal sum of all the issued shares is the issued share capital of the company. The shares of a company are also known as its equity or stock.
There are in existence some non-voting shares for certain companies, the shares usually being designated by the suffix 'A'. These shares normally enjoy most of the benefits of other shares, but the holder has no vote in the company's strategy. The original idea of these shares was to enable control of the company to be retained in the hands of the founding family (controlling the voting stock). However, these non-voting shares are unpopular with major investors, trade at a lower price than the voting stock and are going out of fashion with a gradual conversion from non-voting to voting status. The holders of the original voting stock are usually rewarded by an increased allocation of stock.
The Dividend and its Cover
The dividend of the company is that proportion of its profits paid to its owners, the shareholders. Normally a company will pay only part of its profits as a dividend. The remainder is retained to fund internal growth of the company. It may also serve as a store of 'fat' with which to maintain dividends in lean years, when the profit is falling.
The number of times that a company could have paid its net dividend is the cover of the dividend. If a company makes a profit of one million pounds, but pays only a quarter of a million in dividends, then the dividend is said to be 'covered' four times.
On one day in January 2003, the price and dividend for Great Universal Stores (GUS) was:
Price Yield (%) Great Universal 571 3.9
The cover for the dividend of Great Universal was 1.9. This was discovered from the appropriate entries in the Financial Times.
The company's profits are known as its earnings. When the earnings are divided by the number of shares in existence, we get the 'earnings per share' (eps). The P/E (price to earnings) ratio measures how many years of earnings per share at the current share price would be needed to pay for the share. A P/E of 10 means that ten years of earnings will pay for the price of the share.
Not all of the earnings are paid as dividend, so further years will be needed to repay the share price out of dividends. Against this, however, it is hoped that the earnings and dividends will rise each year, reducing the repayment time of the share price and thereafter all dividends will be pure profit. Of course the stock does not have to be held forever, and can be sold at the current going rate, the 'market price'.
We can discover from the Financial Times that the P/E ratio is:
Great Universal P/E = 13.7
Another important measure of a company's performance is its yield. The yield is typically expressed as a net percentage (ie after income tax) of the current share price. The long term average yield in the UK is around 3.6 per cent net. In other countries the average yield may be different, for example 2.8 per cent in the USA or 1.0 per cent in Japan.
The yields in each country are usually lower than the interest which could be more safely obtained by investment in local bonds, or in the local equivalent of a building society. This is despite the fact that, in general, acceptance of risk entitles the risk taker to a higher return than from a 'safe' investment. The lower return from shares reflects the growth potential of dividend payouts, not usually (and certainly not consistently) seen with 'safe' investments.