What is the use of company shares? Very simple to say that The ownership rights in a corporation are usually symbolized by company shares; that is, the share capital of a corporation consists of a number of units or company shares. Each share represents a relative right to the net assets of the company. Within a category of shares, all shares have the same equal rights.
These company shares are usually transferable between parties. As a result, markets have been established to give investors with an ability to trade in company shares. Where active markets exist like organized stock exchanges, the fair value of a company shares at a given point in time may be measured reliably. A further advantage of transfer-ability is that a change in ownership by one shareholder selling shares to a new investor does not have an effect on the continued existence and operation of the company.
In addition, the right to share equally in the net assets, and therefore the profits or losses of a company, each share has other rights, including:
- the right to vote for directors of the corporation. This ascertains the right of shareholders to have an opinion as owners in the strategic direction of the corporation. Where there are a large number of owners in a corporation, there is normally a separation between ownership and management. The shareholders thus employ professional managers or directors to manage the business. These managers ultimately provide periodic reports to the shareholders on the financial performance (income statement) and financial position (balance sheet) of the company. Some directors are executive directors, being employed as executives in the company, while others have non-executive roles. The directors are elected by voting at the Annual General Meeting of the company, and shareholders cast their votes to elect the directors. The shareholders may vote in person, or by proxy. In relation to the latter, a shareholder may authorize another party to vote on his or her behalf at the meeting; the other party could be the chairperson of the board.
- the right to share in assets on the winding-up or liquidation of the company. The rights and responsibilities of shareholders in the event of liquidation are usually covered in legislation specific to every country, as are the rights of suppliers or creditors to receive payment in preference to shareholders.
- the right to share proportionately in any new issues of company shares of the same class. This right is sometimes known as the pre-emptive right. It ensures that a shareholder is able to keep hold of the same proportionate ownership in a corporation, and that this ownership percentage cannot be diluted by the corporation issuing new shares to other investors, maybe at prices lower than the current fair market value. However, the directors may be allowed to make limited placements of company shares under certain circumstances.