I haven't been fully in this conversation, but has anyone made the point that profit is partly a reward for taking the business risk in an uncertain world?
This bears on why shareholders are sometimes required to pay again when the company needs a hand. If a company needs or wants fresh capital it is sometimes raised by 'rights issues' of new shares, where the shareholder must buy new shares to maintain their stake in the company. (Massively simplified example: Company is deemed to be worth £100. Shareholder A owns one of 100 shares (i.e. 1%) of the company. Company needs or wants capital and issues 100 new shares at £1. If Shareholder does not buy a second share she now owns only 0.5% of the company, so she must buy a second share to maintain her 1% stake. Can the company sell all 100 additional shares for £1 each? Maybe it can, if potential shareholders think the capital is being raised for good reasons, i.e. to invest in new business; all shares will sell at £1 and the company it might now be worth £200 or even more. But if, as is quite common, the capital is needed to repay debts or remedy past mistakes, then it won't sell all its new shares at £1 and overall it may be deemed to be worth less than the total put in by shareholders - who have lost money.
There really are good reasons for the way all these things work.
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branchandroot
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Date: 2011-01-11 12:36 pm (UTC)This bears on why shareholders are sometimes required to pay again when the company needs a hand. If a company needs or wants fresh capital it is sometimes raised by 'rights issues' of new shares, where the shareholder must buy new shares to maintain their stake in the company. (Massively simplified example: Company is deemed to be worth £100. Shareholder A owns one of 100 shares (i.e. 1%) of the company. Company needs or wants capital and issues 100 new shares at £1. If Shareholder does not buy a second share she now owns only 0.5% of the company, so she must buy a second share to maintain her 1% stake. Can the company sell all 100 additional shares for £1 each? Maybe it can, if potential shareholders think the capital is being raised for good reasons, i.e. to invest in new business; all shares will sell at £1 and the company it might now be worth £200 or even more. But if, as is quite common, the capital is needed to repay debts or remedy past mistakes, then it won't sell all its new shares at £1 and overall it may be deemed to be worth less than the total put in by shareholders - who have lost money.
There really are good reasons for the way all these things work.