2012: Advent Trading: What can be traded: Shares

by on December 13, 2012

Currently we’ve covered What a stock market is, and why the prices move on the stock market.

In this article we’ll quickly cover the different types of instruments that can be traded on the stock market.

The most common instrument traded is a share. A share can be considered a percentage of the company. When a company ‘floats’ on the stock market they’ll specify the number of shares of that company that will be on offer and the initial price they’ll sell at. This gives a valuation of the company. The reverse could also have happened; a company has been valued and then releases shares which would then have the price such that adding together all the shares gives the valuation of the company.

There are two categories of shares, those with voting right and those without voting rights. These can be sold at the same time as separate symbols commonly referred to as A and B shares. So A shares come with voting rights, B shares do not. This disparity can make the B shares less valuable, but because people don’t want to hold onto voting rights ( because B shares don’t have any ) so B shares will be traded more frequently.

The A Shares that come with voting rights will allow the person owning the shares one vote per share. This is where ownership of a company comes into play. If you own more than 50% of the shares of the company then you have a controlling vote. This is obviously a bad idea for a company, so it’s normal to only release 10% of the total shares to the public.

Shares can climb and fall in value, but should the price get too high so they won’t be traded as much – it’s just too expensive to buy them. In these situations the company can ‘split’ the shares. The company will declare that they’re going to split the shares in a particular ratio (1:2, 1:4, 2:3). In the examples given if a split was 1:4 it would mean that for every 1 share you own, you now own 4, with all the rights that go with it. This has the effect of dropping the current share price by 4 too, which means that it’s more easily traded.

Shares are also tied to dividends. Twice a year companies can specify that they’re paying a dividend to their share holders, a “thank you” for buying the shares in the first place. The dividend amount is voted on using the afore mentioned voting rights – however the company sets how much. The vote is either, “yes we want the money”, or “no we don’t”, there aren’t any other options. There have been occasions where voters have felt the money should be left in the company, as a dividend will take the money out of the company, lowering the overall value of the company and with it, the share price. Dividends are paid out per share held. In the run up to a dividend being paid out it’s common to see the share price go up as people try to buy the shares to get the dividend payment. After the payment ( jargon: the shares are ex-dividend ), the share price will drop by a proportional amount to the value of the dividend.

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