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An income payment to a shareholder. Usually discretionary, and a large feature of the cash equity market, and a source of endless complication and fun when trying to replicate equity securities synthetically, whether through indices, equity derivatives or futures.
Metaphysical theory
A share is a a contract between a company and an investor representing a transferable ownership ownership interest in the company. Shares are issued in return for capital — not indebtedness: you can’t get your money back, and you can never redeem the share: the share itself has a value which you can only realise by sale to someone else. For as long as you hold it, a share represents full-blown ownership of a pro rata portion of the company, but it has an option element: you get all the profits, but your exposure to the company’s losses is stopped out at the value of capital contributed on subscription of the share. In other words, if the issuer is insolvent — its liabilities exceed its assets — shareholders are not responsible to creditors of the company for the shortfall.[1] As a shareholder’s liability for company debts is “limited” to the value of capital contributed, we call these “limited liability companies”.[2]
See also
References
- ↑ This assumes the shares are “fully paid up” as to capital. Where shares are “partly paid” holders may be obliged to meet a capital call. Once they have and the shares are fully paid, that is the extent of the shareholders’ contractual liability.
- ↑ Compare with a partnership, where each partner remains jointly and severally liable for all the debts of the partnership. In recent times limited liability partnerships have become the thing. These start to look a lot like private limited companies, and you wonder whether there hasn’t been a little sloppiness in the thinking that led to their invention. I.e., if you want your liability limited, form an LLC and don’t have a partnership, you dolt.