Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives

CHAPTER 3

Equity Shares, PreferredShares, and StockMarket Indexes

Introduction

Equity shares or shares of common stock of a company are a type of financial claim issued by the firm to investors who are referred to as shareholders. In return for their investment, the shareholders are conferred with ownership rights. A firm must have a minimum of one shareholder, although there is no upper limit on the number of shareholders a firm may have. Correspondingly, there is no restriction on the total number of shares that may be issued by a firm. Large corporations have a large number of shares outstanding, and their ownership is spread over a vast pool of investors. A shareholder is a part owner of the company to whose shares he has subscribed, and his stake is equal to the fraction of the total share capital of the firm to which he has contributed.

At the outset, when a firm is incorporated, a stated number of shares will be authorized for issue by the promoters. The value of such shares is referred to as the authorized capital of the firm. However, the entire authorized capital need not be raised immediately. Often a portion of what has been authorized is held for issue at a later date, if and when the firm should require additional capital. What is actually issued is less than or equal to what is authorized, and the amount that is actually raised is referred to as the issued capital. The value of the shares that is currently being held by the investors is referred to as the outstanding ...