Saturday, August 14, 2010

Share Types

Types of shares

Depending on their capital requirements, many companies issue different types of shares in addition to ordinary shares. Each type of share and separate classes within each type may have different rights attached.

Your stockbroker can help you to understand the advantages and disadvantages of various types of shares before you invest in them.

Ordinary shares

• Represent the bulk of a company's basic ownership money or equity capital.

• Shareholders benefit from any distributions of dividends and can vote at company meetings. The more ordinary shares they own, the greater their control over the company.

• Rank last behind other types of shares if the company is wound up

Preference shares

• Are entitled to a preferred dividend paid before the ordinary dividend is announced. The dividend is often paid at a fixed rate.

• Have priority over ordinary shareholders for repayment of capital if the company is wound up.

Trust units

• In the form of property trusts and equity trusts.

• From an investor's point of view, units in listed trusts are similar to ordinary shares except that a full distribution of profit is made to unit holders instead of a dividend.

Contributing shares

• A company may issue new shares without requiring full payment immediately. In such a case, it may issue the shares on a contributing or partly-paid basis.

• Shareholders make further payments on certain dates or in some cases, may forfeit their shares.

• Have equal voting rights with ordinary shares and dividends are usually paid on a pro-rata basis.

Rights and bonus issues

Companies can make special issues of rights or bonus shares to shareholders. As a shareholder, it is important for you to understand what each issue entails and the important dates involved. If you have any doubt about such issues you should contact your client adviser/stockbroker.

Bonus issues

Bonus issues are shares issued free of charge to shareholders. The size of the issue reflects the improved value of the company's assets.

Bonus issues are made on a predetermined pro-rata basis, for example, one for ten.

This means you will receive one new share for every ten you currently own. For example if a company in which you hold 1,000 shares announces a 1-for-10 bonus issue, you are entitled to 100 more shares at no cost, which would bring your total holding to 1,100 shares.

Once a bonus is issued, the price of the shares is likely to drop as the value of the company's assets is now spread over a larger number of shares. Bonus shares dilute the market price of the shares in direct proportion to the increase in the total number of shares on issue.

This price adjustment occurs on the ex-bonus (XB) date. An investor who buys the existing shares on or after the XB date is not entitled to the bonus shares - they belong to the previous owner of the shares.

Rights issues

A rights issue entitles existing shareholders to take up additional shares in the company at a below-market price and without having to pay brokerage. Rights issues enable the company to raise additional funds from shareholders, perhaps for expansion or to repay debt. For example, Company X may have a rights issue to raise $300 million to fund its takeover of Company Y.

The process for a rights issue is similar to a float, in so far as a prospectus is prepared and an underwriter is often appointed. Shares are offered on a predetermined pro-rata basis, for example, 1 for 4. This means that for every four shares you own, you can purchase one additional share at the discounted price.

A rights issue may be renounceable or non-renounceable. Renounceable means shareholders are entitled to sell their rights to other investors on the sharemarket if they do not wish to take up the additional shares themselves. Non-renounceable means only existing shareholders can participate and you must either take up the shares or forfeit the rights.

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