When people want to set up a business, they need money, called capital. Companies can borrow this money, called a loan, from banks and pay it back with interest. Capital can also come from issuing shares (BrE) or stocks(AmE) – certificates representing units of ownership of a company. The people who own them are called shareholders (BrE) or stockholders (AmE). The money they provide is known as share capital or equity capital. Share capital can be in the form of ordinary or preference shares. When the company makes a profit, its owners share the benefits by receiving a dividend. Preference shares are shares carrying a fixed dividend. Preference shareholders receive a fixed dividend before ordinary shareholders receive theirs.
The money that a company uses for everyday expenses or has available for spending is called working capital or funds. All the money coming into the company during a given period is revenue. Revenue minus cost of sales and operating expenses, such as rent and salaries, is known as profit, earnings or net income. The company pays a proportion of its profits to its shareholders as dividend, to the government as tax. It also retains, or keeps, some of its earnings for future use (retained earnings).
The key factor in owning any company is the guarantee called limited liability: the owners of a company never have to pay more than they have invested in the company. Their liabilities are limited. If a company goes bankrupt, the owners can never be required to pay its unpaid debts. The worst that can happen to investors in a limited liability company is losing their initial investment if the company fails. The abbreviations “GmbH” in Germany , “Inc” in the US
Many countries make clear distinction between public and private companies, with separate designations such as “AG” and “GmbH” in Germany , or “Plc” or “Ltd” in Britain US
The place where securities of all kinds (stocks, shares, bonds) of quoted companies are bought and sold is called stock market or stock exchange. Sometimes it is a physical location, like the NYSE on Wall Street. Other times there is no location: the NASDAQ is an electronic exchange. Major stock exchanges have a lot of requirements about market listing: trading for at least 3 years, suitable for larger companies with market capitalization of ₤25m plus listing costs about 4-8% of funds raised through the issue shares. Most companies use over-the counter (OTC) markets, such as NASDAQ in New York and the Alternative Investment Market (AIM) in London
Trades between buyers and sellers of securities are arranged by brokers. They represent on the floor different investors: mutual funds, investment funds, pension funds, insurance companies. Institutional investors generally keep securities for a long period, but there are also speculators – people who buy and sell securities rapidly, hoping to make a profit. Securities bought by brokers on the stock exchange are not usually paid for immediately. In the USA London
Stock markets are measured by stock indexes or indices such as the Dow Jones Industrial Average (DJIA) in New York , FTSE 100 index (often called the Footsie) in London , Nikkei in Japan , MICEX in Russia
At the stock exchange share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy show signs of stability and growth. An economic recession, depression or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy. Stock exchanges are considered to have multiple roles in the economy: rising capital for businesses, facilitating company growth, corporate governance, barometer of the economy.
