 Hey guys, it's MJ the student's act tree and in this audio talk, we're gonna be discussing share capital and You know what exactly it is. So this is for subject CT2 and it's chapter 4 So in chapter 4, there's two types of capital that we're really delving into share capital and Loan capital. So the next video will be on loan capital. This one is on share capital and share capital the basics of it kind of gets formed when I Think it was very first issued in the mainstream society back in the Dutch East India company venture What they said was We need a lot of money in order to buy some ships to sail around to India and make all these various trades We'll make a deal with the public or worth what they call investors And they said that if you give us money to buy the ships and do do the whole venture We will give you a share of the profits. So that's where the word share comes in because Let's say they come back with a hundred million and you'd provided 50% of the capital Then you're gonna get 50% of that profit However, when you Deciding to go into as a shareholder. You're also taking on all the risk So if you spend a hundred million on buying these new ships, they sail to India But they get struck by lightning or there's a storm or pirates come or I don't know some sort of disaster strikes Which we term risk the ship gets lost and your money is well it disappears. It sinks so shareholders need to be Centervised in order to take on this risk. So the idea is that this is a lot of risk We're prepared to to pay the money, but we are expecting a very high return as Society has developed and technology is taken on a greater role in our lives. We've come to standard eyes shares and We've got something known as stock markets or or exchanges where people come and they trade share certificates So they say I want to buy 20 shares at this company at this price and in return it gives me a specific percentage of that company and What that does is I get then a Profit share and we call that profit share dividends Now it gets a little bit interesting in the sense that these shareholders come they invest their money into the company But they don't run the company Instead there is a management team. They do all the decisions. They decide, you know, where the ship should sail What what prices they should try and barter And you know what route to go and when they should do that they make all these decisions They're kind of like the captain of the ship If the shareholders are unhappy with the decisions that they're making They can get together and cost a vote and they can therefore say we're gonna vote this management team out and we're gonna put in a different management team and In real life, we see this happening quite a lot with an investor called coral icon so coral icon is He's someone that a lot of companies fear because he goes in and he doesn't just buy a couple of shares that gives him 0.0001% of a company. No, he's coming in with a lot of money he's taking over a significant percentage and He's getting quite actively involved in the management by casting votes having his opinion and Some companies that he's been engaged with you may have heard of them Motorola and Apple He's put a lot of pressure on some cook to say hey, you need to stop paying Dividends, you need to stop paying out some of the cash reserves that Apple has to its investors and because he owns such a large chunk and He is quite a Intimidating character. He's able to rally the other shareholders Convince them that this is a good idea and he is able to put pressure on the captains of the ship in this case Tim Cook I guess there's a joke there captain Cook. Anyway, let's let's get back to the material So what we see is that by buying into shares? I get a dividend or share of the profit and I have the ability to vote for the management team However, there is a lot of risk in the sense that if the company Tanks, we'll see that the loan capital gets paid first before the residual then gets distributed amongst the investors of share capital There is another type of of share capital Which is a little bit of a hybrid between loan capital and share capital and that is something known as a preference share a preference share kind of works on the on the basis that I'm going to give you money and If you make a profit, I want 10% of it or whatever percentage it is If you don't make that profit well then I still want that money but I'll only take it when you do make profit the following year so it can get back dated and the idea of the preference share is that there's a little bit less risk in the sense that If the company has the profits, they pay out the preference share Whereas if you had a normal share, it's up to the managers to decide well Should we pay a dividend and this dividend can be 3% it could be 12% it could be whatever percent Whereas with the preference share it is decided beforehand that they want 10% and What is nice is that they will get Their preference shares paid up before dividends for ordinary share capital is paid out Some preference shares contain the option in order to convert them into normal ordinary share so the idea being that I Like this company. I'm not really sure if I want to become a shareholder. Let me buy some preference shares It's almost like let's go on a date before we get married See if the relationship works out before we commit So that is your preference share and Like I said, it is a little bit of a hybrid between share capital and loan capital But that's what I wanted to discuss in this video is share capital and I just want to end it off by Discussing three key elements When it comes to to finance and that is risk return and market ability Now with share capital We see that there is quite a high chance of risk in the sense that you might not get your money back and because of this risk there's going to be a higher return and What we're going to see is that if I present to you two companies company one is You're buying into a shoe factory. They've got a whole lodge Order on their books. So they just need to you know, get the money buy the leather get the workers And they're going to push out these shares. I mean push up these shoes, which they're going to sell for a nice profit And they'll give you a chunk This is a company that has a much lower risk than say a company that says to you how we want to develop a Complete new form of artificial intelligence that will be able to calculate various things and Replace the need for accountants in the company workplace This is a high-risk venture in the sense that you're going to be investing millions into their the R&D and At the end of the year They might have failed and they might have nothing to show for it But because there's such a high risk involved They will offer you a much higher return in the sense that if you create an artificial intelligence that can reduce the need For accountants you're going to make a lot more money Then if you had invested in a shoe company that had almost a guaranteed income stream of a couple of hundred thousand rands Whereas the artificial intelligence would be bringing in millions, but it's a much higher risk but then we come to this third one which I want to talk about and that is marketability and This one what marketability means is how easy is it to sell this asset on The market, you know, how how many buyers are there? How many sellers are there the more buyers the more sellers the more marketable the asset is Which is a good thing because it means you can then liquidate your position and exchange that asset for cash Which you can then use for emergency situations. So marketability is a good thing But what we're going to see is the more marketable something is the less return Investors are prepared to get for it Markability and risk are also kind of linked in the sense that the higher the risk the less marketable the asset Although that is not always the case as you will see with some derivatives in chapter 5 They can have high marketability and they can have a lot of risk But those are the three three components and I want you to keep them in the back of your mind because in the next Video, we are going to be talking about loan capital But yeah, that's all we got time for now. So thanks so much for for listening. Cheers