Shares: Overview, definition, and example
What are shares?
Shares represent units of ownership in a company or corporation. When an individual or entity buys shares, they are purchasing a portion of the company, which entitles them to certain rights, such as voting on company matters and receiving dividends. Shares can be bought, sold, and traded, and they can vary in terms of rights and privileges depending on the type of share issued (e.g., common shares, preferred shares). Shares are commonly issued by companies as a way to raise capital.
For example, a person who buys 100 shares of a company owns 100 units of that company's stock and has a claim on its profits, such as dividends, as well as voting rights in shareholder meetings.
Why are shares important?
Shares are important because they provide a way for companies to raise capital by offering ownership to investors. In exchange for their investment, shareholders have the opportunity to benefit from the company's growth and success. For the company, issuing shares is a method of funding business expansion, research, or operations without incurring debt.
For shareholders, owning shares offers the potential for both capital appreciation (increase in share value) and income (through dividends). Shares also grant individuals or entities the ability to have a say in how the company is run, typically through voting rights.
Understanding shares through an example
Imagine a startup company needs to raise funds to expand its operations. The company decides to issue 1,000 shares, each priced at $10. An investor purchases 100 shares, contributing $1,000 to the company. As a shareholder, the investor now has ownership in the company and may be entitled to vote on business matters such as electing board members or approving major decisions. If the company becomes more profitable and distributes dividends, the investor will receive a portion based on their 100 shares.
In another example, a publicly traded company may issue new shares to fund a large acquisition. Investors who purchase these new shares may see their ownership percentage diluted, but they might also benefit from the company's potential growth following the acquisition.
An example of a shares clause
Here’s how a shares clause might look in a contract or agreement:
“The Company agrees to issue [Insert Number] shares of common stock to the Investor at a price of $[Insert Price] per share. The shares shall be subject to the terms and conditions set forth in this Agreement and will be delivered to the Investor upon payment of the purchase price.”
Conclusion
Shares are a key instrument in the world of business and finance, offering companies a means of raising capital while providing investors with an opportunity to own part of a company and share in its success. Understanding shares is essential for both businesses and investors, as they play a significant role in ownership, funding, and governance.
For businesses, issuing shares provides flexibility in financing and ownership structuring, while for investors, buying shares represents an opportunity for growth and involvement in the company’s future.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.