Buying shares in a company can be a great way to invest in its growth and future success. When you buy shares, you gain partial ownership and may enjoy certain rights and responsibilities as a shareholder. In this guide, we’ll walk you through the essentials of purchasing shares, covering the benefits, risks and important legal factors to consider.
What is a share in a company?
A share represents a unit of ownership in a company. When you buy shares, you own a part of the company based on how many shares you hold. This ownership often comes with rights, such as voting on important company decisions, receiving dividends when the company earns profits and the potential to sell your shares for a profit later. Anyone who owns at least one share is called a shareholder.
Types of shares
Shares in a company are commonly split into ordinary shares and preference shares.
What are ordinary shares?
Once a business is incorporated, the first members are usually issued ordinary shares. They are the most common share types and are usually given to people like founders, employees or investors. They come with certain rights like voting but don't give shareholders the right to receive dividends.
What are preference shares?
Preference shares are usually issued once the company grows and needs further investment. They have different rights to ordinary shareholders (which will be outlined in the company's articles of association). Typically, they have preferential rights like the right to fixed dividends or priority over receiving dividends over ordinary shareholders.
đź’ˇEditor's insight: "I see lots of people struggle with the idea of a 'dividend'. In business, it's just a payment that a company can make to a shareholder if the business makes a profit. A company would pay dividends to reward shareholders."
How are company shares issued?
In the UK, company shares are issued by the company’s directors. To issue shares, a company needs to check its authorised share capital and any restrictions in its articles. The directors can then pass a resolution to approve the issuance of shares. Finally, the company must then file a return with Companies House and update its statutory register of members to reflect the new shareholders.
What are the benefits of purchasing shares in a company?
Owning shares in a company offers several potential benefits, including:
Profit from company growth: As the company grows and becomes more profitable, the value of its shares may increase. Shareholders can benefit from capital gains by selling shares at a higher price.
Dividends: Many companies pay dividends to shareholders as a share of the profits, providing an additional source of income.
Influence in decision-making: Owning shares often grants voting rights, allowing shareholders to have a say in key decisions, such as electing directors or approving mergers.
Portfolio diversification: Investing in shares can diversify your portfolio, spreading risk across different companies or industries.
What are the risks of purchasing shares in a company?
While purchasing shares offers opportunities, it also comes with inherent risks. Understanding these risks helps investors make informed decisions and assess their tolerance for potential losses.
Volatility: Share prices can fluctuate due to market conditions, economic changes, or company performance.
Dividend uncertainty: Dividends are not guaranteed, and a company may reduce or suspend payments during financial difficulties.
Potential loss of investment: If a company underperforms or goes bankrupt, shareholders may lose their investment.
Dilution of ownership: If a company issues new shares, existing shareholders’ percentage of ownership may decrease.
What is the process of buying shares in a business?
The process of purchasing shares varies depending on the company’s size and whether it is publicly or privately owned. Completing these steps ensures that the purchase is lawful and aligns with your investment objectives. And whether you're looking for a partial investment or to purchase a business outright, it's always wise to get legal advice from a buying a business solicitor.
Identify the type of company: Public companies list their shares on a stock exchange, while private companies sell shares privately.
Research the company: Understand the company’s financial performance, growth potential and industry trends.
Secure funding: Ensure you have the necessary funds to purchase the desired shares.
Open an investment account (for public companies): Use a brokerage account to buy shares listed on a stock exchange.
Negotiate with the seller (for private companies): Work directly with the company or a current shareholder to agree on terms.
Sign a share purchase agreement: A share purchase agreement is a legal document that outlines the terms of the transaction and ensures the sale is legitimate.
Things to consider when buying shares in a business
When buying shares, several factors require careful consideration to maximise your investment’s potential.
Percentage of shares
The percentage of shares you purchase determines your ownership stake in the company. For example, owning 10% of a company’s shares means you have a 10% claim on its equity and profits. Larger stakes may grant greater influence over decisions but also come with increased financial exposure.
The type of share
Companies may issue different types of shares, including:
Ordinary shares: Provide voting rights and potential dividends.
Preference shares: Offer priority in receiving dividends but typically lack voting rights.
Redeemable shares: Allow the company to buy back shares at a later date.
Non-voting shares: Hold no voting power but may still earn dividends.
Understanding the type of shares helps you assess the level of control and benefits they provide.
Rights and restrictions
Shares may come with specific rights, such as the right to vote at shareholder meetings, receive dividends, or inspect company records. However, some shares may have restrictions, like limitations on transferability or rights contingent on company performance.
How a solicitor can help
A corporate solicitor plays a vital role in ensuring a smooth and legally compliant share purchase. Working with a solicitor provides peace of mind and safeguards your investment against unforeseen complications. They can:
Draft or review the share purchase agreement to protect your interests
Conduct due diligence to uncover any financial or legal risks associated with the company
Advise on the tax implications of your investment
Assist in navigating regulatory requirements, especially for complex transactions
FAQs
Do you need a share purchase agreement?
Yes, a share purchase agreement is essential for private company transactions. This document outlines the terms of the sale, including the price, payment structure, and rights attached to the shares. It protects both parties and ensures the transaction complies with the law.
What happens when you buy shares in a business?
When you buy shares, you become a shareholder with ownership rights in the company. Depending on the type of shares, you may gain voting power, a share of profits, and the ability to sell your shares for potential profit in the future.
Can I just buy shares in a company?
Yes, buying shares in a public company is straightforward through a stock exchange or broker. For private companies, you must negotiate directly with the company or its existing shareholders. Learn more in our guide to private vs. public companies.
How does buying shares in a small business work?
Purchasing shares in a small business typically involves negotiating with current shareholders, agreeing on a price, and drafting a share purchase agreement. Small businesses may issue shares to raise capital or transfer ownership.
How many shares does a company have?
The number of shares a company has is determined during its incorporation and outlined in its share capital. This figure can vary widely, with some companies issuing millions of shares and others keeping it more limited. The Companies Act 2006 does not provide an upper limit.
Is a shareholder the same as a director?
No, a shareholder is someone who owns at least one share in a company. A director is appointed by the shareholders to manage the operations.
Final thoughts
Purchasing shares in a company offers a pathway to ownership and potential profits. However, the process has big legal, financial and strategic considerations. By understanding the benefits and risks, and seeking expert advice, you can make informed decisions that align with your goals.
References
Shareholders and guarantors from Gov.UK