This extract from the book “Investing in stocks & shares” provides the reader with a series of definitions concerning shares.

As an introduction, the reader is told what a share represents for the investor, that is, the right to have a share in the company’s dividend as well as the right to vote in the company’s Annual Meeting of Stockholders.

Secondly, assets are made up by two parts: the cash the company holds, its possessions, e.g. equipment, and the business’ stock, minus its liabilities (borrowings etc.).

Next, the “Nominal Share Value”, initially stood for the asset value of the business. This means that if a share had a nominal value of 25p (which was very usual), but was sold at a higher price, this reflected the company’s possible future profits.
There is also another type of shares, which do not allow the investor to vote in the business’ strategy. These shares were originally constituted, so that the family that had started the business could still have control over it. Nonetheless, these shares are preferred by very few investors and are therefore cheaper and less traded.

The dividend is the amount of the profits that the shareholders are paid. The company usually pays only a fraction of the earnings as a dividend and holds the rest not only as capital for future growth, but also as a means of stock in case the business declines during following years. The “cover” of the dividend is how many times the company could have paid the dividend if it had not saved anything for the future.

The “price to earnings ratio” informs us about how many years would be needed to buy one share at the current “earnings per share” ratio (profits divided by the number of shares). As every business aims to increase its revenues and dividends, it hopes to reduce the repayment time of the share price, too.

Last but not least, the “yield”, which is commonly represented as a net percentage of the share price, is normally lower than the interest rate of bonds, even though bonds are believed to be “safer”. The share’s low return is partly due to the fact that dividends are paid to shareholders.

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