Chapter 2
Equities
Companies issue equities to provide them with a permanent stock of capital to fund their business activities. The investors in that company are known as shareholders, as each investor holds a share in the ownership of the business. The investor expects to be rewarded in two ways. If the company does well then the market value of each share will increase over time, providing the investor with capital growth. In addition, the investor expects that the company will also provide a source of income in the form of regular dividends. Dividends are a way of distributing the profits of the company to its shareholders.
There are no guarantees that the investor will in fact benefit from either capital growth or from dividend income. For example, a young company with an exciting new product which it is bringing to market for the first time may not have any income to distribute yet, but because other investors take a very positive view of its long-term prospects, there may be considerable scope for capital growth. At the other end of the spectrum, an old established company that produces low technology products that do not require lots of investment may have a high income, but very limited prospects for capital growth.
Case study: Amazon.com
Amazon.com was founded in 1994 and issued its shares to the public for the first time in 1997, at US$18.00 per share. It made losses until 2002 when it produced a profit of US$5 million, just 1¢ per share, on revenues of over US$1 billion. ...
