Company Share Capital

The heart of capitalism is private ownership. Ownership in a company is certified through shares stating that “the holder of this share owns a part of this company”. The part of the capital of a company which belongs to the owners (shareholders) of the business is called equity capital or share capital. Share capital can be in the form of ordinary or preference shares. When the company makes a profit, its owners share in the benefits by receiving a dividend. Ordinary shares are the most common kind of shares. Ordinary shares give the holder voting rights in the company. Preference shareholders have only limited voting rights with respect to company affairs, but holders of preference shares have a higher priority if the company goes bust and is liquidated. Preference shares carry a fixed dividend which is received before ordinary shareholders receive theirs.

A company’s equity capital is divided into shares (stocks) which have an equal nominal value (face value/par value). If shareholders sell their shares the buyer may pay more or less than the face value according to whether the company is doing well or badly.

The key factor in owning any company is the guarantee called limited liability: the owners of a company never have to pay more than they have invested in the company. Their liabilities are limited. When a company goes bankrupt, the owners can never be required to pay its unpaid bills. Since the identity of shareholders can be kept secret, the creditors of a bankrupt company have no right to pursue them for company’s unpaid debts. The worst that can happen to investors in a limited liability company is losing their initial investment if the company fails. The abbreviations “GmbH.” in Germany, “Inc.” in the United States, or “Ltd.” in most other English-speaking countries indicate a limited liability company.

Many countries make a clear distinction between public and private companies, with separate designations, such as “AG” and “GmbH.” in Germany, or “Plc.” and “Ltd.” in Britain. Generally, “public” companies are those large enough to have their shares traded on stock exchanges (stock markets), while smaller unquoted companies are said to be “private”, even though their shares can be held by the public at large. In some countries, a large company is said to be “privately owned”, if its shares are not available to the general public. In the United States, where little distinction is made between public and private companies, most companies simply bear the title “Incorporated” (Inc.).

People dealing for other people on the Stock Market are called brokers. Securities bought by them on the Stock Exchange are not usually paid for immediately. In the United States, it isnecessary that accounts be settled (should be settled) within five days. In London, the year is divided into 24 accounting periods. Deals must be settled on Settlement Day, which is the last day of each accounting period. Because of this, some speculators agree to buy securities thinking that their price will rise so that they can resell then for a profit before Settlement Day. These people are known as “bulls”. “Bears” are speculators who sell securities hoping to buy them back at a lower price.

Every major stock market around the world has at least one index which is used to represent the stock market as a whole. For example, the Dow Jones Industrial Average tracks the prices of thirty of the most prestigious blue-chip stocks on the New York Stock Exchange (NYSE). In London, the name of the major stock index refers to the leading financial newspaper, the Financial Times (FTSE-100). In Japan, for example, the Nikkei 225-Stock Index also receives its name from the acronym of Japan’s leading financial newspaper.

For businesses and governments in many countries around the world, corruption is a way of life. Corruption takes all forms: without some sort of bribery government officials in many countries will not approve imports or exports; company presidents want money deposited into secret Swiss bank accounts before signing any contracts; and military officers refuse to pay for shipments of arms without a monetary “present”.

Corruptive businesses and governments may get involved in money laundering practices. A money laundering scheme is the process that turns large sums of illegally earned funds (“dirty” money) into “respectable” money. The key to any money laundering scheme is to get the money into legitimate bank accounts. Once the money is in a legitimate account, it can be transferred electronically around the world without interference from the authorities. Swiss bank accounts are especially useful for money laundering schemes because once money passes through a respectable Swiss bank, it is accepted anywhere in the world. When several Swiss banks were found to be facilitating the activities of international drug traffickers in the 1980s, the Swiss authorities finally decided to break open several secret accounts that were linked to illegal activities abroad.

COMPREHENSION CHECK

Exercise 1. What is wrong in the following statements? Say it in English.

1. One can always buy or sell company’s shares at face value.

2. Shareholders are personally responsible for the payments of all debts,

if a limited liability company in which they have invested fails and goes bankrupt.

3. If the company’s shares are quoted on the Stock Exchange, this company is generally considered to be private and the designation “Ltd” comes directly after its name.

4. The designation “Inc” indicates that the company is “public”.

5. Securities bought by the brokers at the Stock Exchange in London must

be paid for within 24 days.

6. Corruptive practices are very rare in international trade, government

officials never accept bribes.

7. The key to any money laundering scheme is to get the “respectable” money into legitimate bank accounts without transferring it electronically

around the world.