Company Shares

[roadiewill]

Can anyone just give me a little lesson on what exactly a 'share' in company is. For example, Im writing an essay about the credit crunch and will need to explain how/why northern rocks shares plunged.

Thanks

 

[gavintc]

Take something simple like a bike shop, The owner wants to expand and buy a 2nd shop in the next town. He lacks funds, does not want a bank loan, so he divides his business into 100 equal shares. He might keep 51 of these share so he maintain overall control and sells to people 1/100 of his business. This brings in fresh money to allow him to expand, but all these people own a small element in his business and will demand that he tells them about how their investment is going. He might also be required to give them a share of his profit each year.

 

[andyfromotley]

if it is a big company then the shares will be listed on a stock exchange so that the shares can be bought and sold. The most well known stock exchange is the London stock exchange (LSE) the top one hundred shares of which form the FOOTSIE 100. Listing places certain, expensive and administrative burdens on a company so only large ones tend to go for it. The plus side is that it provides a ready and highly efficient market place for your shares. So our man turns his bike shop into a 200 shop chain making about 5 million per year. he decides to go public (list his shares on a stock exchange) and splits the company up into 60 million shares and offers them for sale. The market will decide if the price being offered represnts good value. If it does then all of the shares will be snapped up. The reason for doing this are mainly to raise massive cash for expansion or to take a big cash reward for building such a large and successful company, usually a mix of both.

Once they are listed then the shares are on their own. Goods news (like a total traffic ban) will lead to an increased demand for those shares and a subsequent rise in their price. Bad news (cycling causes cancer!) shares will fall.

Often the actual profit or loss of the company will not be too relevant, shares tend to be bought and sold on future propects rather than current trading conditions.

Check out the MOTLEY FOOL website for a nice gentle and funny run through of all things financial

www.fool.co.uk


hope this helps

andy

 

[andyfromotley]

with specific reference to northern rock, my views are this.

Northern Rock borrowed cheap money on the international money markets.
It lent it to you on your martgage at a higher rate. about 1-2% higher than it 'pays' for that money. Doesnt sound much but remember thats 1-2% of tens of billions of pounds! thats a lot!

Housing markets in the US goes tits up and international money market refuses to lend to businesses that rely on the housing market (northern rock). Bingo - overnight they have no business. They cant use savers money to issue mortgages because they have relatively few savers to start with (and many less once the story breaks!).

So as a business their prospects going forward over the next few years were very poor. They cant get money, they cant lend = No profit. Shares into free fall.

You will note that they werent making a loss. If all of their mortgages are repaid they will continue to make a profit going forward. Much smaller but a profit none the less. The trouble is their shares were being traded in anticipation of their continued growth.

it is easy to confuse northern rock with other banks, but it wasnt like them, they have lots of money making wheezes but Northern Rock really was a one trick pony (mortgages) hence its stunning demise.

hope my take is correct and that it helps

andy

 

[roadiewill]

Thanks guys.

Alos, what does it mean when Northern Rock wer elending more than 100% of house value to borrowers...? Dont quite get that..

 

[wafflycat]

Northern Rock were lending over 100% of the value of the property on a limited number of deals, limited lending criteria. Up to 125% value of the property. Of which 90%-95% was a loan secured on the property, the balance being an unsecured loan, with a maximum amount of £30000 unsecured. It was actually useful to quite a few folk, if you knew your employment was secure and your earnings going up and you don't want to move property in the short term.

 

[andyfromotley]

you want to buy a house worth £100k.
trouble is you havent saved a bean. so they lend you up to 125k. this allows you to pay all of the associated fees say £6000. Kit out the house from ikea £5k. go on holiday 3k. lose the rest playing poker on the internet.

They are gambling that the price of your house will rise so they are covered if you default on the loan. You will spot that houses prices currently are not playing this game which leaves both you and northern rock in the smelly stuff. Some people pointed out that this was irresponsible and highly specualtive lending. Those people were dismissed as old dinosaurs who didnt understand the 'new' economic rules. Hmmmmmmm.

You would of course pay another 1-2% in interest for taking out such a loan. Although to be fair, not as many of these mortgages were issued as one might think. Northern rock in particular is/was considered to have a sensible and secure mortgage book.

andy

 

[Blue]

Thanks guys.

Alos, what does it mean when Northern Rock wer elending more than 100% of house value to borrowers...? Dont quite get that..

When you buy a property the actual cost thereof isn't the total outlay. Things like stamp duty, fees and furnishings increase the outlay. The 100%+ deals allowed people to borrow for these costs. The only problem is that people can then get over extended in relation to their debt and if they default the lender is in a weak position in relation to getting their money back as the valuable asset, the house, won't cover the extra. Such products were one of the many that were offered when everyone was riding the wave of the expanding economy and housing market - problem is that the bubble burst!!

 

[red_tom]

The Subprime Primer is well worth a quick look if you fancy an explanation of that as well. (Don't worry, it's all stick figures and there are jokes and everything .)

 

[cheadle hulme]

Thanks - fantastic link.

 

[bonj2]

somebody explain the fed/jp morgan vs greenbacks situation etc you must know the story by now

 

[JtB]

Radio 4 was talking about 'derivatives' this evening in relation to the Lehman Brothers situation. Can anyone please explain what this nebulous term means?

 

[bonj2]

something that's been 'derived'. i.e. contrived.

 

[red_tom]

Radio 4 was talking about 'derivatives' this evening in relation to the Lehman Brothers situation. Can anyone please explain what this nebulous term means?

Futures, options, that kind of thing. They are tradeable items based on the value of an underlying stock, index or other variable.

 

[buggi]

if it is a big company then the shares will be listed on a stock exchange so that the shares can be bought and sold. The most well known stock exchange is the London stock exchange (LSE) the top one hundred shares of which form the FOOTSIE 100. ...

FOOTSIE actually spelt FTSE 100 - which is the Financial Times Stock Exchange top 100.