Long-term financing of companiesto the shareholders in the form of a cash dividend. The amount that each shareholder
receives is linked directly to the number of shares he or she owns. The amount of each
year’s dividend is at the discretion of the directors.
Dividends are often portrayed as being the reward of the shareholders, in much the
same way as a payment of interest is the reward of the lender. This is, however, a dubi-
ous interpretation of the nature of dividends. All profits, whether paid as dividends or
reinvested by the directors, belong to the shareholders. If funds generated from past
profits are reinvested, they should have the effect of causing an increase in the value
of the shares. This increase should be capable of being realised by shareholders who
sell their shares. It remains the subject of vigorous debate as to whether reinvesting
profits is as beneficial to the shareholders as paying them a dividend from the funds
concerned. This debate is examined in Chapter 12.
As we have seen, if the company were to be closed down and liquidated (wound
up), each equity holder would receive an appropriate share of the funds left after all
other legitimate claimants had been satisfied in full.
Where shares are traded between investors, there is no reason why they should be
priced according to their original issue price or according to their face value (nominal
or par value). Perceptions of the value of a share in any particular company will
change with varying expectations of economic circumstances, so that share prices will
shift over time.
It should be noted that a shareholder selling shares in a particular company for
some particular price has no direct financial effect on that company. The company will
simply pay future dividends and give future voting rights to the new shareholder.
It is the ordinary shareholders who have the voting power within the company.
Thus it is the equity holders who control the company.
Each ordinary share confers equal rights on its owner in terms of dividend
entitlement, repayment on liquidation and voting power. Two shares carry exactly
twice as much of these rights as does one share. The law forbids the directors from
discriminating between the rights of different shareholders other than on the basis of
the number of shares owned (assuming that the shares owned are of the same class).
Ms X owning 100 shares in Z plc should have equal rights in respect of her share-
holding to those of Mr Y who owns the same number of shares in the same company.
The LSE and other non-statutory agencies also seek to promote this equality.Preference shares
Preference sharesrepresent part of the risk-bearing ownership of the company,
although they usually confer on their holders a right to receive the first slice of any
dividend that is paid. There is an upper limit on the preference share dividend per
share, which is usually defined as a percentage of the nominal value of the share.
Preference share dividends are usually paid in full. Preference shares give more sure
returns than equities, though they by no means provide certain returns. Preference
shares do not usually confer voting rights.
Preference shares of many UK companies are traded in the LSE. As with equities,
prices of preference shares will vary with investors’ perceptions of future prospects.
Generally, preference share prices are less volatile than those of equities, as dividends
tend to be fairly stable and usually have an upper limit.
For most companies, preference shares do not represent a major source of finance.‘