Shareholders and Share Capital

This lesson explores the role of shareholders in limited companies, the nature of share capital, how market capitalisation is calculated, the purpose and significance of dividends, and the factors that influence share prices. This is part of AQA topic 3.1.2.

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What Is Share Capital?

Key Definition: Share capital (or ordinary share capital) is the money raised by a company through the sale of shares to investors. Each share represents a unit of ownership in the company.

When a company issues shares, it is effectively selling small portions of ownership. The money received from investors becomes part of the company's capital and is used to fund the business's operations, growth, and investment.

Types of Share Capital

Term	Meaning
Authorised share capital	The maximum value of shares a company is permitted to issue (this concept was abolished for companies formed after October 2009 under the Companies Act 2006, but still applies to older companies)
Issued share capital	The total value of shares that have actually been issued to shareholders
Paid-up share capital	The amount shareholders have actually paid for their shares (shares can be partly paid)

For A-Level purposes, the key concept is ordinary share capital — the total value of ordinary shares issued by the company.

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Market Capitalisation

Key Definition: Market capitalisation (market cap) is the total market value of a company's outstanding shares. It is calculated as:

Market Capitalisation = Current Share Price × Number of Shares Issued

Example

If Tesco plc has 7.5 billion shares in issue and the current share price is £3.00:

Market Cap = 7,500,000,000 × £3.00 = £22.5 billion

Market capitalisation is the stock market's valuation of the entire company. It fluctuates constantly as the share price changes.

Classification by Market Cap

Category	Market Cap	Examples
Mega-cap	Over £100 billion	Apple, Microsoft, Saudi Aramco
Large-cap	£10 billion – £100 billion	Tesco, BP, Barclays
Mid-cap	£1 billion – £10 billion	JD Sports, Greggs, Domino's Pizza Group
Small-cap	Under £1 billion	Many AIM-listed companies

Exam Tip: Market capitalisation is not the same as the value of the company's assets. It reflects what investors are willing to pay for shares — which is based on expectations of future profits, not just the current balance sheet.

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Dividends

Key Definition: A dividend is a payment made by a company to its shareholders from its profits. It is the shareholders' share of the company's earnings.

Dividends are usually expressed in pence per share and are paid quarterly, semi-annually, or annually.

Example

If a company declares a dividend of 10p per share and you own 5,000 shares:

Dividend income = 10p × 5,000 = £500

Key Points About Dividends

Point	Explanation
Dividends are not guaranteed	The board of directors decides whether to pay a dividend and how much. In difficult years, dividends may be cut or suspended
Retained profit vs dividends	A company must balance paying dividends (to keep shareholders happy) with retaining profit for reinvestment
Dividend yield	A measure of the return on investment: Dividend Yield = (Annual Dividend per Share ÷ Share Price) × 100
Growing companies may pay low dividends	Companies like Amazon historically paid no dividends, preferring to reinvest all profits into growth
Mature companies tend to pay higher dividends	Companies like Unilever and British American Tobacco have long histories of paying reliable, growing dividends