Before a business can function 2 ingredients are essential: people and money without either, no business could take off.
For the limited company, funds are initially provided by the shareholders. Ordinary stocks (or shares) are commonly described as “equities”, indicating that the holders are entitled to what is left of the assets and profits, after certain claims have been met.
The stock is broken down into units os, say 50p each, which is then described as a nominal value. This is the value used for the calculation of dividends. So, if a dividend of 10% is paid on a 50p stock unit, the dividend will amount to 10% of 50p, i.e. 5p per unit.
The dividends on ordinary stock will be related to the profits made by the company. Thus, if the profits are good the ordinary stockholder can expect to receive an attractive dividend. However, before the dividend is paid the directors of the company may wish to recommend part of the profits being ploughed back into the business.
The fact that dividends are normally very in line with profits fives the person who holds ordinary stock some possible protection against the falling value of money – another discribtion for inflation.
This hedge against inflation operates in the following manner. In the case of a typical manufacturing company, where there is a rise in the cost of raw materials and wages, the company can usually compensate for this by raising the price of its finished goods. In this way its profit can be increased, wholly or partially in line with the general rate of inflation.
Ordinary stocks normally, but not invariably, carry voting power. Some stocks units are even issued which give more than one vote per stock unit, but multiple voting stock, as it is called, is not common. Some investors are willing to accept non-voting ordinary stock on the grounds that they do not wish to exercise voting power in any case. However, when there is a take-over in the offing, the voting stocks would be expected to stand at a premium in relation to the price of the non-voting stocks.
Whoever owns more than 50% of the voting stock is sure of controlling the elections to the Board of Directors. Yet many boards own much less than this proportion of voting stock between them. They are still able to select their own replacements for any directors who die or retire, since other groups of shareholders will be disorganized and unaware of the issues and personalities involved.
The existing Board of Directors in a large public limited company (PLC) is likely to remain in effective control so long as the company’s performance satisfies the majority of the voting shareholders. But if the company falters there could be a stockholders’ revolt leading to the replacement of the existing board or at least elements of it.