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The net fixed assets of a company, plus the working (i.e. current assets minus current liabilities) minus the long term liabilities, are "financed" by the shareholders' capital.
Shareholders' capital consists of both:
• The nominal value of issued (minus any amounts not yet called up on issued shares)
• Reserves.
The share itself might consist of both ordinary shares and preference. All reserves, however, are owned by the ordinary shareholders, who own the "equity" in the company.
Called up share
A companies issued capital is it is called like this, provided that there are no shares in issued which have so far only been partly called up.
Types of Shares
We can distinguish three types of shares,
• Preference
• Deferred
• Ordinary
Preference shares
Preference shares are shares which confer certain preferential rights on their holders.
The rights attaching to preference shares are set out in the companies contribution. They may vary from company to company, but typically:
• Preference shareholders have a priority right over ordinary shareholders to a return of their capital if the company goes into liquidation.
• Preference shares do not carry a right to vote.
• If the preference shares are cumulative, it means that before a company can pay an ordinary dividend it must not only pay the current years preference dividend, but must also make good any arrears of preference dividends unpaid in previous years.
Deferred
Deferred are equity shares that will receive a dividend only after other classes of shares including ordinary have received a specified rate of dividend, or will receive a dividend only after a specified time from issue.
Ordinary
Ordinary are shares which are not preferential with regard to dividend payments. Thus a holder only receives a dividend after fixed dividends have been paid to preference shareholders.
Ordinary shares normally carry voting rights; they are effective owners of a company. They own the "equity" of the business, and any reserves of the business belong to them.
The premium
By "premium" is meant the difference between the issue price and its nominal value. When a company is first incorporated the issue price of its shares will probably be the same as their nominal value and so there would be no share premium. If the company does well the market value of its shares will increase, but not the nominal value. The price of any new shares issued will be approximately their market value.
The companies act states that "where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the premiums on those shares shall be transferred to the share premium account".
A share premium account is an account into which sums received as payment for shares in excess of their nominal value must be placed.
The share premium account cannot be distributed as dividend under any circumstances.
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