Issues in understanding forms of business

'Forms of business' includes the factors that affect and are affected by business owners, especially shareholders.

3.1 The role of shareholders

Shareholders own a share of the business, proportionate to their shareholding. If someone owns 50,000 shares in a business that has issues 5 million shares, they own a 1% stake in the business. Therefore he or she has 1% of the voting rights when it comes to decisions to be made at the annual general meeting (AGM). 

For the company, the role of the shareholder is to provide the capital to get the business going and to keep it growing; for the shareholder, the point of share ownership is the degree of influencer it gives, and the reward it provides. Most shareholders are only interested in the dividends they recieve yearly.

Each year a public limited company must invite all its shareholders to an annual general meeting. There the shareholders have the right to question the board of directors on any aspect of the company's performance or policies. Normally, only a handful of shareholders attend the meeting but more turn up when there's a controversial issue.

3.2 Shareholder rewards

There are two main financial rewards for company shareholders:

• Annual divident payments
• A rise in the value of the shares

Annual dividend payments are decided upon by the company directors when they know the final figure for the profit for the year. Most companies have a clearly set dividend policy, such as Ted Baker's policy to pay out around half of they year's profit to its shareholders. The dividends they recieve are in proportion to shareholdings.

3.3 Influences on the price of shares

The value investors placeon a share depends on the profit after tax the company makes (known in the UK as its 'earnings') multiplied by the value investors place on those earnings. If investors have a great deal of confidence about the future of the business they'll pay a high multiple.

3.4 The significance of share price changes

In the short term, there is no actual impact on a business of a change in its share price. The share capital of the business was invested permanently by the shareholders. So if they lose confidence in the business and want to sell their hares, they have to find another buyer - they cannot demand their money back from the company. 

In the longer term, the…