What are actions?
1.- What are shares?
The shares are the proportional parts in which the capital of a company is divided. An action is therefore aparticipation or small portion of a company. If the company is listed on the Stock Exchange, its shares can be bought and sold there. Shares, which are traded on the stock market, have alisting valueand thisobeys the laws of supply and demand.
If a company has a promising future and it is thought that in the future it will produce more profits, many people will want to buy shares of that company to obtain those profits and increase their wealth. When many people want to buy a product and it is limited, it is natural that the price of that product increases. This also works with actions. On the contrary, if many people want to sell a share, the price, or rather the share price, goes down.
2.- How can I earn money with shares that are listed on the Stock Market?
With shares you can earn money in two ways:
1) The first is throughcapital gains. When you buy a stock at a low price, hold it for a while waiting for the share price to rise, and then sell it, you have gained capital gains.
2) The second possibility of earning money with the shares is the participation in the profit of the company. When a company makes profits, a part of those profits stay in the company to finance future projects and the other part is distributed to its shareholders, these are the so-calleddividends.
The price of the shares is not fixed but rather varies and dividends are not guaranteed either, but in the event that the company distributesdividends, these also tend to vary. That is why theActionsarevariable income financial assets.
This all sounds like a very lucrative business. But why would the company want to give small portions of itself and dividends to someone outside the company? The following chapter explains the purpose of actions for companies and how it is carried out.
3.- Purpose of the actions for companies
The main purpose of the shares is to acquiregreater liquidity or more capital to grow or expand your business.
Let us assume, for example, the existence of the company XYZ SA Said company wants to expand or has an innovative idea for a new product. For this, the company needs 4 million Euros with which to build, for example, a new production plant, a warehouse and to be able to sell that product. The company XYZ has two options when it comes to covering that financial need of 4 million, borrow or increase its own capital. In most cases they are carried out together:
1) In the first option, company XYZ can borrow a bank loan or issuebondsor promissory notes In this way it is said that the company XYZ incurs a debt or an obligation and is obliged to pay interest and repay the money borrowed.
2) The second option is financing through own capital by issuing new shares. This means that the owner (or co-owners) can invest the 4 million out of their own pocket or allow third parties to participate, who would invest in the XYZ company. These people are called partners in the case of a limited partnership and shareholders in the case of a corporation.
The XYZ company is now owned by the shareholders in the proportion in which they have invested in the new share capital of the company. If the previous registered capital was 6 million and now through the expansion 4 million are added, the registered capital after the expansion will be 10 million. If the former owner of the company contributes, for example, 1.5 million to the expansion, he now owns the 6 million before the investment plus the 1.5 million that he has invested in the expansion. The rest of the investors have then contributed 2.5 million to complete the 4 million. This means that the part of the company belonging to the former owner is 1.5 plus 6 divided by 10. That is, 75% of the company.
4.- Risks and rights
Unlike banks granting credit or individuals purchasing company bonds or notes, shareholders are not entitled to interest or principal repayment. However, the shareholders do have the right to participate in the annual profits of the company but also in the losses. Investing in shares is therefore an investment with risk but which in turn has a great opportunity for profit. HeThe risk of investing in shares is the partial or total loss of the value of the shares.. The losses that can be made in ordinary shares are not unlimited, this means that you can lose all the invested capital when the share becomes worth 0, but you cannot lose more_cc781905-5cde -3194-bb3b-136bad5cf58d_invested money, since a share cannot be worth less than 0 Euros.
Shareholders have right to distribute dividends, if they exist. In addition to this share in the company's profits, shareholders havevoting rightsand they can take part in important decisions at the general shareholders' meetings, which public limited companies are required to hold annually and to which all shareholders are invited. In the case of a capital increase like the one we have just explained, the shareholders prior to the capital increase also have the right to buy the new shares before others, this is calledpreferential subscription right. Finally, we do not forgetRight to information, that is to say, to be informed about the results of the company, about its next steps, etc... And of course, theright to free transmissionand sale of shares at any time.
There are some rights that vary depending on the type of share purchased, but we will see this in the next video, in which we will explain the differenttypes of actionsthat exist.