Shares - how do they work?

[SoulKiss]

Probably one for Northy, but here goes.

My understanding of Shares is thus.

1) I have a company, it is valued at £100

2) I need £20 to grow, so I decide that I will create 100 shares, and sell 20 of them for £1 each, promising that each share will get 1% of Net Profit.

3) I make £50 profit, so I keep £40 and pay each of my shareholders £0.50 as a dividend.

4) I say that with the extra money I made I will be able to make even more next year, forecasting between £75 and £100 profit.

5) My shares are now popular and some of my shareholders are able to sell what they bought for £1 for £1.20, which on top of the £0.50 they earned as a dividend, made them £0.70.

6) I then make the £100 profit I had forecast, put the £80 profit in my bank and pay out a £1 dividend to those that have the shares.

Where is the connection between the share price and my company.

Surely when I got the money for the 20% of the company it separated the shares from me, my only connection/obligation being to pay the percentage of the profits to the shareholders.

If I make a loss I cannot claim that percentage back from them.

Where is this theory wrong, and if its right, why are we worried about share prices dropping?

Surely the only value of the shares are what people are willing to pay based on past returns and forecasted returns?

[Gazza77]

Originally Posted by SoulKiss

Probably one for Northy, but here goes.

My understanding of Shares is thus.

1) I have a company, it is valued at £100

2) I need £20 to grow, so I decide that I will create 100 shares, and sell 20 of them for £1 each, promising that each share will get 1% of Net Profit.

3) I make £50 profit, so I keep £40 and pay each of my shareholders £0.50 as a dividend.

4) I say that with the extra money I made I will be able to make even more next year, forecasting between £75 and £100 profit.

5) My shares are now popular and some of my shareholders are able to sell what they bought for £1 for £1.20, which on top of the £0.50 they earned as a dividend, made them £0.70.

6) I then make the £100 profit I had forecast, put the £80 profit in my bank and pay out a £1 dividend to those that have the shares.

Where is the connection between the share price and my company.

Surely when I got the money for the 20% of the company it separated the shares from me, my only connection/obligation being to pay the percentage of the profits to the shareholders.

If I make a loss I cannot claim that percentage back from them.

Where is this theory wrong, and if its right, why are we worried about share prices dropping?

Surely the only value of the shares are what people are willing to pay based on past returns and forecasted returns?

Like houses, people are worried their shares are worth less than they paid for them, or less than they used to be. Unless you planned to sell them, or the company goes into liquidation or is nationalised (banks ) then it is only a paper loss rather than a real one. Prices can and do go up as well as down...

[SoulKiss]

Originally Posted by Gazza77

Like houses, people are worried their shares are worth less than they paid for them, or less than they used to be. Unless you planned to sell them, or the company goes into liquidation or is nationalised (banks ) then it is only a paper loss rather than a real one. Prices can and do go up as well as down...

My point is not about the shares - its the link that the shares have to the business AFTER the capital has been raised by the event of the share issue.

ie, how does the share price of a bank dropping mean that its actually worth less, there is no less cash in the vaults etc....

[the_lone_wolf]

Originally Posted by SoulKiss

Shares - how do they work?

they don't...


haven't you been watching the news?

The value of a share is supposed to represent the current value of the future revenue stream from dividends. In practice it is anything but, because short term outlook is driven more by market speculation and sentiment.

Sometimes the value of shares can affect the finances of a firm indirectly. It can affect their borrowing costs and also it can affect how much they can raise by issuing new shares.

However, the share price dropping is supposed to mainly represent the fact that the firm is doing worse, and will therefore not be able to pay out as much in dividends in the future.

[embee]

You're trying to be too logical about it. Shares are just what it says, it's a "share" in the ownership of the company.

Someone starts a private company, it does well, grows, the owner/s want to realise some of the "value" so float the company on the stock exchange. Its value, and the value of the shares, is whatever the investors think it's worth, just like selling anything. They'll weigh up what they think the company potentially offers in growth and dividends (think of dividends in a similar way as interest on savings, may be more, may be less, may be nothing, no guarantee) and the share price will end up at whatever investors are prepared to pay. The market-makers do the deals and try to run the price up as much as they can until people stop buying, then that's the value.

The shareholders then own the company and can vote on how it's run.

If it does well then other investors want part of it so are prepared to pay more for the shares, if it goes down the pan the shareholders lose their investment.

The share value is simply whatever you can get for them, there's a lot of sentiment/feeling/herd mentality involved, not much logic.

[SoulKiss]

Originally Posted by embee

You're trying to be too logical about it. Shares are just what it says, it's a "share" in the ownership of the company.

Someone starts a private company, it does well, grows, the owner/s want to realise some of the "value" so float the company on the stock exchange. Its value, and the value of the shares, is whatever the investors think it's worth, just like selling anything. They'll weigh up what they think the company potentially offers in growth and dividends (think of dividends in a similar way as interest on savings, may be more, may be less, may be nothing, no guarantee) and the share price will end up at whatever investors are prepared to pay. The market-makers do the deals and try to run the price up as much as they can until people stop buying, then that's the value.

The shareholders then own the company and can vote on how it's run.

If it does well then other investors want part of it so are prepared to pay more for the shares, if it goes down the pan the shareholders lose their investment.

The share value is simply whatever you can get for them, there's a lot of sentiment/feeling/herd mentality involved, not much logic.

Again I understand that - I think I covered it in my original post.

Its how does the price of these bits of paper that only promise to pay if there is a profit, losing value can cause a bank/company to "fail".

I'm looking for the connection.

The closest I see is when they borrow against the value of the company which they work out using the fact that shares are worth £1, we have 1000 of them, therefor we can borrow against that £1000 valuation.

If that IS the case then how is it that the "Money Brains" cant see what I can - that its a load of rubbish and stupid to boot........

Originally Posted by SoulKiss

If that IS the case then how is it that the "Money Brains" cant see what I can - that its a load of rubbish and stupid to boot........

they can and they new about it at least 2 years ago when they were reviewing their portfolios they chose to do nothing about it since the market seemed full of pace for growth. what you see now is every skeleton that has been left in a clauset

[punyXpress]

ie, how does the share price of a bank dropping mean that its actually worth less, there is no less cash in the vaults etc....[/quote]
There's no cash left in the vaults cos Brown G nicked it all.
Most share prices are only influenced by ' the institutions ' so thee & me don't count.