We already know the basic principles of the world of stocks. But, not all companies are the same, nor are their stocks. Let’s see what happens when a company needs to capitalize on taking on new challenges, obtaining that capital, and how it makes the public participate in this growth, through shares. We will also learn why companies issue different types of shares.
Private companies and public companies
Not all stocks are traded on the stock markets. Let’s suppose that two entrepreneurs decide to establish a technology company and look for a third party to provide them with capital. When this company is founded, its initial shareholders are its three founding partners. They own all the shares of the brand new company.
Until then, the company and the shares are private. They are difficult to market and in general, partners tend to sell shares to each other if one decides to withdraw or reduce their participation.
Over time, that company will need to increase its capital, expand its businesses, and its partners to recoup part of the investment. So you decide to get 10 million dollars of capitalization. To do this, it will issue 1 million shares for $10 each. These shares will be offered to the market through what is known as an Initial Public Offering (IPO). From that moment on, the shares of that company are public and are traded on the stock market.
Ordinary shares and preference shares
When referring to the shares of a company, generally, that reference is to ordinary shares. They are the most common that exist. They grant rights to their holders.
Companies also often issue shares known as preference shares. Unlike ordinary shares, preference shares do not generally grant political rights. In other words, they do not give voting rights at shareholders’ meetings. However, they have some advantages. They have priority in the distribution of dividends. They can even have dividend distribution clauses, although the company does not distribute among the ordinary ones.
If the company went bankrupt, preferred shares have priority to be redeemed, and their holders have a better chance of recovering their investment.
In our next article, we are going to focus on the bull and bear markets with stocks. We will learn more about the stock markets and the different types of existing trade.