Shares & Shareholding (AQA A Level Business): Revision Note

Reasons to buy shares

• Investors buy shares in a plc for several reasons

• Dividend income

  • Regular payments from company profits provide an ongoing return on investment

• Capital growth

  • If the share price rises over time, shares can be sold for more than their purchase price, generating a profit

• Voting rights

  • Shareholders can vote on major decisions at the AGM, giving them influence over the company's direction

• Portfolio diversification

  • Spreading investment across shares in different companies and sectors reduces overall investment risk

Influences on share prices

• The share price is the price at which a single share in a plc can be bought or sold on the stock exchange at any given moment

• Share prices fluctuate constantly, reflecting how investors collectively judge the company's current performance and future prospects

Why does the share price change?

• Company performance

  • Strong profits and revenue growth increase investor confidence and push the share price up

  • Poor results have the opposite effect

• Dividend payments

  • Higher dividend payments can attract more buyers, increasing demand for shares and raising the price

• Economic conditions

  • Rising interest rates, high inflation or falling consumer confidence can reduce share prices across the market

• Market sentiment

  • Investor confidence, news stories, analyst recommendations and broader market trends all influence how buyers and sellers value shares

• Competition and industry trends

  • Developments in the sector, such as the entry of a major rival or regulatory changes, affect how investors assess a company's prospects

• Leadership changes

  • The appointment of a new chief executive or significant changes to the board of directors can cause share prices to rise or fall, depending on investor reaction

Consequences of changes in the share price

Shareholder calculations

• Investors and analysts use financial calculations to assess the value of a plc and the returns it offers to shareholders

Market capitalisation

• Market capitalisation is the total market value of a company

Why is it important?

• It gives shareholders a clear sense of the total value of their investment in the company

  • A rising market capitalisation means their shares are worth more

• It allows comparison of company size across different businesses, helping investors decide where to invest

• A high market capitalisation makes the company harder to take over, since a potential acquirer would need to buy a very large number of shares

  • This protects existing shareholders' interests

Formula

Market capitalisation = Number of issued shares × Current share price

Dividends per share

• Dividends per share are the income a shareholder earns per share held

Why is it important?

• This calculation shows exactly how much income a shareholder receives for every share they hold, making it easy to calculate total dividend income

  • A rising DPS signals that the company is growing its profits and rewarding shareholders more generously over time

  • A falling or cancelled DPS may indicate financial difficulty, giving shareholders an early warning that the business is under pressure

Formula

Dividends per share = Total dividends paid ÷ Number of ordinary shares

Dividend yield

• Dividend yield is the dividend per share expressed as a percentage of the share price

Why is it important?

• This calculation allows shareholders to compare the income from shares directly against other investments, such as savings accounts or bonds

  • It helps investors assess whether a company's shares offer good value for money relative to alternatives available in the market

• A very high dividend yield can sometimes be a warning signal

  • It may reflect a falling share price rather than a genuinely generous dividend, so shareholders should interpret it alongside other financial data

Formula

Dividend yield = (Dividend per share ÷ Share price) × 100