What is a Share?
According to Mariam Webster dictionary, shares refer to the part allotted or belonging to one of a number owning together property or interest. A share represents a unit of ownership in a company. It signifies that the shareholder is a part-owner of the company and is entitled to a share of its profits, assets, and voting rights. Shares are typically issued by companies to raise capital for business operations, expansion, or other financial needs. Think of a book. Owning a share in a company is like owning a page in a book. Each page is a small part of the whole story. The more pages you have, the more of the story you control. If the book becomes popular and valuable, your pages (shares) increase in worth. Additionally, having more pages gives you a bigger say in how the story (company) unfolds. In short, a share is a piece of ownership in the larger narrative of a company.
Types of Shares
Companies offer shares to the public to raise capital for various business needs such as expansion, operations, or other financial goals. These shares can be issued in different classes, each conferring distinct rights in terms of voting, dividends, and the return of capital during liquidation.
- Ordinary Shares (Common Stock)
Ordinary shares, also known as common stock, are the most prevalent type of share issued by companies. They represent equity ownership in a company and entitle the shareholder to a proportionate share of the company’s profits and assets.
Key Characteristics:
Dividends: Shareholders are entitled to receive dividends if the company declares them. Dividends for ordinary shares are usually paid after the company has satisfied obligations to holders of preference shares. The decision to pay dividends is typically made by the company’s directors, based on the company’s profitability. If the company does not make a profit, no dividends are paid, and in the event of liquidation, ordinary shareholders are last in line to receive any remaining assets after all liabilities and preference share obligations are settled.
Voting Rights: Ordinary shares generally carry voting rights, allowing shareholders to participate in the decision-making process during general meetings. This includes voting on key issues such as the election of directors and major corporate policies.
Entitlement to Surplus Assets: In the event of a company’s liquidation, ordinary shareholders have a right to any surplus assets remaining after all other claims have been satisfied. However, this often means they receive nothing if the company’s debts exceed its assets.
- Preference Shares (Preferred Stock)
Preference shares, also known as preferred stock, offer shareholders preferential rights compared to ordinary shares, particularly in terms of dividends and asset distribution in the event of liquidation. These shares are typically issued with specific terms that outline their privileges.
Key Characteristics:
Fixed Dividends: Preference shares usually come with a fixed dividend rate, which is paid before any dividends are distributed to ordinary shareholders. This makes them an attractive option for investors seeking a steady income.
Priority in Liquidation: In the event of liquidation, preference shareholders have a higher claim on the company’s assets than ordinary shareholders, though they rank below debt holders.
Cumulative vs. Non-Cumulative: Cumulative preference shares accumulate unpaid dividends, which must be paid out before any dividends can be paid to ordinary shareholders. Non-cumulative preference shares do not have this feature; if a dividend is missed, it is not carried forward.
Participating vs. Non-Participating: Participating preference shares allow shareholders to receive additional dividends beyond the fixed rate if the company achieves certain profit levels. Non-participating preference shares limit the shareholder to the fixed dividend rate, regardless of the company’s performance.
Convertible vs. Non-Convertible: Convertible preference shares give shareholders the option to convert their preference shares into ordinary shares at a predetermined rate, allowing them to benefit from potential capital gains. Non-convertible preference shares do not offer this option.
Redeemable vs. Non-Redeemable: Redeemable preference shares can be bought back by the company at a future date, usually at a pre-agreed price. Non-redeemable preference shares cannot be bought back by the company.
- Bonus Shares
Bonus shares are additional shares issued to existing shareholders without any extra cost, usually from the company’s retained earnings. These shares are distributed in proportion to the number of shares already held by the shareholder.
Key Characteristics:
No Additional Investment Required: Shareholders receive bonus shares free of charge, making them an attractive benefit.
Capitalization of Profits: Bonus shares are issued by capitalizing the company’s reserves or profits, effectively converting retained earnings into share capital.
No Immediate Cash Flow Impact: While issuing bonus shares increases the number of shares outstanding, it does not immediately impact the company’s cash flow since no cash is paid out to shareholders.
- Employee Stock Options (ESOs)
Employee Stock Options (ESOs) are a type of share that companies offer to their employees as part of an incentive or compensation package. These options give employees the right to purchase shares of the company at a predetermined price at a future date.
Key Characteristics:
Incentive for Performance: ESOs are often used as a tool to align the interests of employees with those of the company’s shareholders, incentivizing employees to contribute to the company’s success.
Predetermined Price: The exercise price is set at the time the option is granted and is usually based on the market price of the shares at that time.
Vesting Period: There is often a vesting period before the employee can exercise the option to purchase shares, which encourages long-term commitment to the company.
Potential for Capital Gains: If the company’s share price increases over time, employees can purchase the shares at the lower exercise price and potentially sell them at a higher market price, realizing a profit.
Other Types of Shares
Founders’ Shares: These are shares granted to the founders of a company, often carrying special voting rights or other privileges.
Deferred Shares: These shares typically carry fewer rights than ordinary shares, such as lower or deferred dividends, and are often used to reward founders or key executives.
Treasury Shares: These are shares that have been repurchased by the company and are held in the company’s treasury. They do not carry voting rights or receive dividends while held by the company.
Growth Shares: These shares are typically issued to employees and directors and are designed to reward them for achieving specific performance targets. They often have limited or no voting rights.
How Shares Are Apportioned, Valued, and Managed in the Nigerian Market
In Nigeria, the apportionment of shares is guided by a company’s structure and the decisions made by its founders or shareholders. Common methods include:
- Equal Apportionment: Shares are divided equally among founders or initial shareholders, particularly in smaller companies or partnerships where contributions are balanced.
- Contribution-Based Apportionment: Shares are allocated based on the financial contributions of each shareholder. This method is often used when initial capital or subsequent investments differ among shareholders.
- Valuation-Based Apportionment: Shares may be distributed according to the valuation of each shareholder’s contributions, such as intellectual property or expertise. This method tailors the distribution to reflect the specific value each party adds to the company.
These apportionment methods are influenced by the company’s authorized share capital, regulatory requirements, and shareholder agreements, with oversight from bodies such as the Corporate Affairs Commission (CAC) and the Securities and Exchange Commission (SEC).
The ideal number of shares a company owner should hold varies depending on factors such as the company’s structure and the owner’s goals. In Nigeria, minimum share capital requirements are set by the CAC:
- Private Companies: Must have a minimum issued share capital of ₦100,000.
- Public Companies: Must have a minimum issued share capital of ₦2,000,000.
These figures represent the baseline equity required. However, owners may opt to hold a larger number of shares to maintain greater control or influence over the company.
Determining the Price of Shares
The price of shares is determined by a combination of factors, including:
- Market Demand and Supply: The primary driver of share prices is the balance between supply (the number of shares available) and demand (the number of investors wanting to buy). High demand with limited supply tends to drive prices up, while an oversupply with low demand typically leads to lower prices.
- Company Performance: The financial health, profitability, and growth prospects of a company play a significant role in determining its share price. Positive earnings reports or growth forecasts can boost share prices, whereas poor performance can result in price declines.
- Economic Conditions: Broader economic factors, such as interest rates, inflation, and economic growth, also impact share prices. For example, higher interest rates can lower share prices by increasing borrowing costs.
- Regulatory Environment: Changes in laws or regulations affecting a particular industry can influence investor sentiment and, consequently, share prices.
- Investor Sentiment: Market psychology, news, rumors, and broader trends can cause fluctuations in share prices, reflecting the collective sentiment of investors.
Public and Private Shares in Nigeria
Public and private shares represent two fundamental types of corporate structures in Nigeria, each offering distinct advantages and challenges. Understanding these differences is crucial for both business owners and investors.
Public shares
Public shares are offered to the general public through an Initial Public Offering (IPO) and can be traded on a stock exchange, such as the Nigerian Stock Exchange (NSE). Public companies typically have a larger number of shareholders, resulting in dispersed ownership. This structure allows public companies to access a broader pool of investors, facilitating significant capital raising for expansion and growth. However, going public entails stringent regulatory requirements, including regular financial reporting and transparency obligations, which can impose substantial costs on the company.
Private shares
Private Shares are held by a limited group of shareholders and are not available for trading on public stock exchanges
These shares cannot be traded on a stock exchange, resulting in concentrated ownership and greater control for the owners. Private companies often rely on personal funds, loans, or venture capital for capital raising, which can limit their ability to access large amounts of capital quickly. However, they face fewer regulatory burdens, allowing for more operational flexibility and confidentiality regarding financial matters.
Optimal Shareholding for Company Owners
The ideal shareholding for a company owner depends on several factors:
- Control: Owners may prefer to maintain a majority stake to retain control over company decisions.
- Dilution: Issuing additional shares can dilute the owner’s percentage of ownership, affecting their influence and control.
- Investor Expectations: Investors may require a significant ownership stake to engage in company governance, influencing the owner’s shareholding strategy.
- Tax Implications: The structure of shareholding can impact tax liabilities, affecting how owners structure their ownership.
The choice between public and private shares in Nigeria involves balancing access to capital with control. Public shares offer broader opportunities for raising capital but come with increased regulatory scrutiny and costs. Private shares provide more control and flexibility but may limit access to larger capital markets. Business owners should carefully consider their goals, growth ambitions, and preferences for control when deciding between public and private share structures.
Conclusion
At Crimson Oak, we focus on making things easier for your business. Our team is here to support you whether you’re dealing with public or private markets, managing share distribution, or planning your capital-raising strategies.
When you work with us, you’re not just hiring financial experts; you’re gaining partners committed to helping your business succeed. We’ll guide you through challenges, uncover opportunities, and help you achieve sustainable growth. Crimson Oak is your reliable advisor as you navigate the business world.
Reach out to us today and discover how we can help your business thrive.
References
- What Are Shares? How They Compare to Stocks
https://www.investopedia.com/terms/s/shares.asp - Minimum Share Capital Requirements in Nigeria
https://www.linkedin.com/pulse/minimum-share-capital-requirements-nigeria-sidebriefafrica/ - CAC share capital Threshold for company registration
https://distinctcushy.com/blog/cac-share-capital-threshold-for-company-registration/ - Minimum issued Share Capital Requirement in the CAMA 2020
https://www.aluko-oyebode.com/insights/minimum-issued-share-capital-requirement-in-the-cama-2020/ - Share Capital Requirements underNigerianLaw
https://pavestoneslegal.com/cama-2020-share-capital-requirements-under-nigerian-law/ - Share Capital and Classes of Shares in Nigeria
http://www.resolutionlawng.com/share-capital-and-classes-of-shares-in-nigeria/ - Types of shares: Ordinary and Preference
https://youtu.be/dmDG3yfIaQ4?si=z88T3IQEn1CUgO_J
