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What are 'Shares'

Shares are units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends. The two main types of shares are common shares and preferred shares. Physical paper stock certificates have been replaced with electronic recording of stock shares, just as mutual fund shares are recorded electronically.

BREAKING DOWN 'Shares'

When establishing a corporation, owners may choose to issue common stock or preferred stock.

Most companies issue common stock. The stock may benefit shareholders through appreciation and dividends, making common stock riskier than preferred stock. Common stock also comes with voting rights, giving shareholders more control over the business. In addition, certain common stock comes with pre-emptive rights, ensuring that shareholders may buy new shares and retain their percentage of ownership when the corporation issues new stock.

In contrast, preferred stock typically does not offer appreciation in value or voting rights in the corporation. However, the stock typically has set payment criteria; a dividend that is paid out regularly, making the stock less risky than common stock. Also, preferred stock may often be redeemed at a more beneficial price than common stock. Because preferred stock takes priority over common stock, if the business files for bankruptcy and pays its lenders, preferred shareholders receive payment before common shareholders.

Authorized and Issued Shares

Authorized shares comprise the number of shares a company’s board of directors may issue. Issued shares comprise the number of shares that are given to shareholders and counted for purposes of ownership.

Because shareholders’ ownership is affected by the number of authorized shares, shareholders may limit that number as they see appropriate. When shareholders want to increase the number of authorized shares, they conduct a meeting to discuss the issue and establish an agreement. When shareholders agree to increase the number of authorized shares, a formal request is made to the state through filing articles of amendment.

Example of Shares

Near the end of June 2016, investors were taking advantage of falling share prices as a result of Brexit. Such declines had not been seen since the credit crisis of 2008. Much cash was being invested in banks such as Barclays PLC and homebuilders such as Barratt Developments PLC, two sectors that experienced the biggest price drops. Exchange-traded funds (ETFs) that follow the Financial Times Stock Exchange (FTSE) 100 and the FTSE 250 were actively invested in as well. With the market being down, investors took advantage of buying more shares at lower prices, potentially increasing their long-term profits.

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