Key Business Terms
Business: AQA A Level (2023 Specification), topic 1.2.1
Key Business Terms
Here are some key business terms:
Unlimited and limited liability
- Limited companies can raise additional finance by selling shares. Individuals or groups who buy shares in limited companies are called shareholders.
Ordinary share capital
- Ordinary share capital refers to the amount of finance raised through selling shares to shareholders. Businesses usually use ordinary share capital as a source of long-term finance.
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Market capitalisation
- Market capitalisation is one way of valuing a business and can be calculated by multiplying the number of shares issued by the current market price of one share.
Example of market capitalisation
- For example, in 2013, Royal Mail issued one billion shares at 330p each, generating ordinary share capital of £3.3 billion.
- Royal Mail’s shares are now worth around 395p, so Royal Mail’s market capitalisation could be calculated by multiplying the current share price, 395p, by the number of shares, which is one billion, giving a market capitalisation of £3.95 billion.
Dividends
- Businesses may decide to share a proportion of their profits with shareholders, and this payment is called a dividend.
- Dividends have advantages and disadvantages for businesses:
- Dividends can make shareholders satisfied so that they do not wish to sell their shares.
- Dividends can mean that profit is not spent on long-term growth which can limit the growth potential of the business.
Test yourself on Key Business Terms
Do businesses use ordinary share capital as a source of short or long term finance?