Stocks

A share (German: Aktie, Dutch: Actie, from Latin: actio - [among other things] the right (to something), which can be defended in court) – an issue-grade security, a share of ownership of the company, securing the rights of its owner (shareholder) to receive part of the profits of the joint-stock company in the form of dividends, to participate in the management of the joint-stock company and to a part of the property remaining after its liquidation, in proportion to the number of shares owned by the holder.

Background

The first modern shares date back to 1531, when Italian traders established the first stock exchange in Bruges, a city that played a significant role in international trade. The stock exchange in Bruges focused on serving foreign traders. It was in Bruges that such concepts as the exchange bulletin and official quotations appeared – in 1592, the first list of securities values was made public for the first time.

Categories of shares

There are common and preferred shares:

Common shares give the right to participate in the management of the company (generally, 1 share corresponds to one vote at a shareholders' meeting, except for cumulative voting) and participate in the distribution of the company's profits. The source of payment of dividends on common shares is the net profit of the Company. The amount of dividends is determined by the board of directors of the company and recommended to the general meeting of shareholders, which may only reduce the amount of dividends relative to that recommended by the board of directors. Dividends are distributed to the holders of common shares in proportion to the funds invested (depending on the number of shares purchased).

Preferred shares may introduce restrictions on participation in management and may also give additional rights in management (not necessarily), but in comparison with common shares have a number of advantages: the possibility of receiving guaranteed income, priority allocation of profits for dividends, priority redemption of the share value in case of liquidation of the joint-stock company. Dividends are often fixed as a certain percentage of accounting net income or in absolute monetary terms. Dividends on preferred shares may be paid both from profits and from other sources – according to the company's charter.

As a rule, there are significant restrictions on participation in the management of companies, which is due to the fact that mass privatization of enterprises under Type 2 and Type 3 provided for the transfer of preferred shares to the labor collective, while depriving them of the right to vote at shareholders' meetings.

The preferred shares have a number of privileges in exchange for the right to vote. Their holder has a defined amount of income at the time of issuing and offering the securities. The amount of the liquidation value is determined. Priority in the accrual of these payments over those for common shares.

Cumulative (accumulative) ones. The privileges are the same. The obligation to pay dividends is retained and accrued. Fixed term of dividend accumulation. If dividends are not paid, holders of this type of shares receive voting rights for a period until dividends are paid.

Analog of preferred shares – founders share – a share distributed among founders of joint-stock companies and giving them some preferential rights. Holders of such shares can:

• have an additional number of votes at the shareholders' meeting;
• exercise the preemptive right to receive shares in case of their subsequent issuances;
• assume a key role in resolving all issues related to the activities of joint-stock companies.
• For registered shares the data on their holders are registered in the register of the joint-stock company. According to the law, holders of registered shares may be individuals and legal entities.

Bearer shares allow their free purchase and sale on the secondary market without the need to re-register the holder. Russian legislation allowed for the issuance of bearer shares until 2002. Since 2003, shares may only be issued in the form of registered securities

The total value of a quoted company's property and intangible assets is usually significantly different from the total value of its shares. A potential buyer of shares is not so much interested in the asset-backed nature of the shares but rather in the level of profitability or yield that the company in question provides.

Valuations are usually done by investment banks or independent research agencies that provide independent stock price analysis. If the calculated value of shares is higher than the current quotation, they are called undervalued, if it is lower – overvalued. Often the undervalued ones include shares of small and little-known companies (small-cap companies).

Investing in undervalued companies is quite popular as it can bring significant returns in a short period of time.

There are many methods used in the world practice to determine the price of shares, the most common of which are the following:

• valuation method based on expected return;
• valuation method based on dividend changes;
• projected future cash flows are adjusted to the present using the discounted method;
• modified stock valuation model.

A share is an instrument for investing capital, it refers to equity securities. The investment potential of a stock depends on a number of characteristics, the main ones being the issuer's financial health, reliability, liquidity and profitability.

Investment potential of common shares is related to the fact that they can be traded on the stock exchange or over-the-counter market and generate income not only in the form of dividends, but also due to changes in value in different periods of time. Fluctuations in value can be very significant and far outweigh dividends. Many joint-stock companies do not pay dividends, but the value of their shares can increase several times.