Shares and Bonds

Ownership in a company is conferred by issuing a share of the company in the form of a transferable certificate, and then selling that share to a person or an institution, who thus becomes an owner of that proportion of the company represented by that share. A registered company is legally bound to issue a minimum number of shares, which must be sold to its forming members. Once this minimum number is sold, a company can then issue as many shares as it likes, and sell some or all of them to whomsoever wishes to buy them. 

The money raised from the sale of these shares is kept by the company (as owners funds ) and is used to pursue the company s business. Once sold by the company, a share can be traded (on the appropriate stock market), and the company can buy back its own shares in this way if it wants to do so, at any time. The value of the share on the stock market 

In order to raise new funds, a company can, at any stage in its lifetime, issue a new batch of shares and sell some or all of them. If the company is doing well and obviously expanding, then it will probably be able to sell these shares at a premium above the face value. If, on the other hand, the company is doing badly and needs the money to stave off disaster, then it will almost certainly have to offer the shares at a discount below the face value. 

This is an important way of raising money, but a new share issue dilutes the existing share ownership, and may be unpopular with existing shareholders. It is normal, therefore, to offer the new issue first to existing owners. 

Shares give their owners the rights to (but no guarantee of) an annual dividend, and also rights to a share of the assets if a company is wound up, but the key characteristic of a share is its ownership of a part, however small, of the company. 

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The sale of both shares and bonds can be keyed to their intended use for a specific project, and if the project idea is a good one, whose purpose is easily conveyed to the potential investors, then the sale is correspondingly eased. 

The price processes of shares and bonds, as well as interest rate processes, are stochastic processes. That is, they exhibit a random change over time. For the purposes of modelling, the change in asset prices is divided into two components. These are the drift of the process, which is a deterministic element, also called the mean, and the random component known as the noise, also called the volatility of the process. 

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