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2.2.4 Shares/Equities

  • The primary market in shares is the new issue market.

  • The secondary market is the trading in existing shares.

  • Quoted shares are shares quoted on the Stock Exchange.

  • Unquoted shares are not quoted on the Stock Exchange.

  • Listed securities refers to securities traded on the Stock Exchange, including:-


    1. Company Shares.
    2. Fixed Interest Securities.
    3. Government Securities.
    4. Local Authority Securities.
    5. Other Public Sector Stocks.

  • Unlisted securities include:-


    1. AIM Stocks.
    2. Building Society Deposits.
    3. Bank Deposits.
    4. National Savings.

  • Types of shares include:-


    1. Ordinary shares give owner the right to vote and an entitlement to share of dividend.
    2. Preference shares are given in return for loans and confer a preferential right to interest dividend, and to repayment on winding up - but have no voting rights.
    3. Debentures are a document of evidence of a loan.
    4. Share warrants are issued to fully paid up shareholders to convert, say, loans to fully paid up shares at a future date.
    5. Scrip issues, also called capitalisation issues, are issues of 'free' or 'bonus' shares in proportion to fully paid up shares; the exercise reduces the value of each individual share but by spreading the valuation in this way it helps release the built up capital reserves held in the fixed assets.
    6. Rights issues are issues of additional shares at below market price in proportion to fully paid up shares, but must be bought.
    7. Stock is effectively a block of shares, issued usually in units of £100 value.

  • Income prospects for shares will depend on dividend payments, which themselves depend on the overall profitable performance of the company.

  • Capital growth will be reflected in the increase in the value of the share, which itself will be caused by a number of factors:-


    1. Market perception of potential company performance in the future.
    2. Capitalisation, market strength and management of the company.
    3. The state of the economy, in particular the market sector of the firm in question.
    4. Political influences affecting the market sector.

  • Shares of quoted companies are bought and sold through stockbrokers, whose role it is to obtain the best market price for a client. It is essential to realise that shares do not have a fixed price, but change according to the usual supply and demand pressures.

  • New shares may be purchased:-


    1. Through an offer for sale to the public, the price being fixed.
    2. Through a tender, as with privatisation issues, where the would be purchaser offers a price.
    3. Through a placing, where an issue is sponsored by a merchant bank who effectively underwrite the risk of all the shares not being sold.

  • Charges for both buying and selling are through a fixed percentage on the value of the transaction usually up to 1½%, with a minimum charge imposed.

  • Shares may be suitable purchases for:-


    1. Those requiring income, provided the shares pay dividends.
    2. Those requiring capital growth.
    3. Those looking for a risk element in their portfolio; the risk element of shares will depend on market sector, economic conditions, political conditions, management, market perception, amongst other factors.
    4. Those looking for a medium to long term investment i.e. five years or more.
    5. Those who wish to manage their own investment portfolio.

  • Share dividends are received net of a 10% tax credit. No further liability for lower or basic rate taxpayers. Higher rate tax- payers have an additional liability of 22½% of the gross dividend and so pay 32½% income tax on dividend income. Non taxpayers are unable to reclaim the 10% tax deducted.

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