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Author Topic: A very off-topic question regarding shares  (Read 482 times)

Demon Chicken

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A very off-topic question regarding shares
« on: 05 September, 2005, 12:08:27 AM »
OK, as I lay in bed last night I was struck by an interesting question: What determines the number of shares a company can sell?
i.e. do they have only 1000 shares? 5000 this year but get another 2000 next year?

I could only come up with one possible explanation.  When a company floats on the stock market it has a set value, this value is therefore the total value of shares that can be sold.  They decide what the selling price of a share is based on their total value and thus work out a "total" number of shares.  Does this sound even vaugely sensible?  Are there any economists out there to clarify? Will I have to forever live in doubt?

James

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Re: A very off-topic question rega...
« Reply #1 on: 05 September, 2005, 12:55:26 AM »
I don't really know how it works, but in my job I get an allocation of shares every year:

At the end of the Financial year(beginning of october for me, American company), a percentage is allocated up to a maximum of 14% depending on how well they have done. Each employee then gets 14% of their annual earnings converted into shares at the current market value.

e.g. 14% of ?20,000=?2800. Current share price-?28.00. 100 shares allocated.

Every year the shares mature by 25% so at the end of 4 years I can exercise my shares, do a cashless transaction and pocket the difference in share prices between now and 4 years ago, assuming the shares have gone up in value.

I am waiting for the end of year results before I cash in, expecing a cheque for between ?6-7000.

Ch-ching!

Dunno if that helps any mind.

The Enigmatic Dr X

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Re: A very off-topic question rega...
« Reply #2 on: 05 September, 2005, 03:25:59 PM »
There are two types of share - authorised and issued. The limit on the number of issued shares is the number of authorised shares.

The way I explain this to clients is as follows:-

Imagine authorised shares as a bath. The size of the bath (ie the number of authorised shares) dicates how much water the bath can have in it.

Issued shares are the bathwater. At any time there can be a little or a lot of water, but you can only fill it up to the brim.

If you have reached the limit of issued shares and want to issue more, then the company simply makes a "bigger bath" by increasing the authorised share capital limit.

Some specifics:-

1) Share capital needs to be denominated in a currency. Usually sterling, but this is not absolutely necessary. It has to be a currency someone could pay (ie not francs or lire)

2) There is no ceiling on authorised share capital. You could have it set at a billion pounds, but not issue that many. Frankly, though, this looks daft.

3) You must have at least one share issued.

4) In private limited companies (ie those ending "limited" or "ltd") shareholders set the authorised capital and approve the issue of shares. The price is set privately but must be at least the value of a share (1p per share if you have penny shares, ?1 per share if you have ?1 shares) or else (normally) the rights attaching to the share (a right to vote and get a dividend being the main ones) can be restricted. (Until a "call" is made for the unpaid balance). The price can be more than the miniumum value and frequently is, creating "share premium" which is used by the company.

5) I am not an expert on public companies (plcs). These can be listed (ie on the FTSE) or unlisted. I think, though, that the same rules apply regarding the number of shares that can be issued - they just tend to have very big authorised share capital and sometimes small shares (1p, 10p) to maximise the numbers that can be in issue. For listed companies the share price is set, in essence, by supply and demand. If the company is doing well, or their are rumours of a big contract or sale, then its shares are in demand and hence go up in value. If there is a dip in the market overall (eg oil becomes expensive or there is a disaster) then shareholders might cash in on their investment (big pension companies do this in times of crisis to (a) get into gold which is a "safe" investment and (b) to drive down the price of shares so they can buy them later at a knock down price). If people want to buy shares then they are either issued from the authorised share capital or else bought from a seller.

I am not sure what happens if there is a surplus of unbought shares at any point (someone has to own them) but there is a fairly complex computer system called CREST (last two letters stand for Share Transfers but I don't know the rest) that tracks the buying and selling of shares to deal with this.

Here endeth the lecture.

Lock up your spoons!