Joint Stock Company: Types, Features & Functions

TAKEAWAYS:

• A joint stock company is a business owned by many shareholders who buy shares to become part-owners.
• It can be private (limited shareholders, no public trading) or public (shares traded on stock exchanges).
• Key features include limited liability, transferable shares, and perpetual succession.
• Advantages include large capital, easy transfer of shares, and professional management.
• Disadvantages include complex formation, slow decision-making, and conflict between owners and managers.

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What is a Joint Stock Company?

A joint stock company is a type of business organization where the total capital is divided into small parts called shares. Many people (called shareholders) buy these shares to become owners of the company.

Key Features of a Joint Stock Company

Here are the main characteristics that make it different from other business forms:

How Does It Work?

1. Formation: A group of people comes together to start a company.
2. Capital Collection: They issue shares to raise money.
3. Management: A Board of Directors runs the company.
4. Profit Sharing: Profits are divided among shareholders as dividends.
5. Growth: The company can expand by issuing more shares.

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Types of Joint Stock Companies

There are two main types:

1. Private Limited Company

• Definition: A company where shares are not sold to the public.
• Features:
  • Minimum 2 and maximum 200 shareholders.
  • Shares are not traded on stock exchanges.
  • Directors have more control over decisions.
• Example: Small to medium-sized businesses like local manufacturing firms.

2. Public Limited Company

• Definition: A company where shares are sold to the public.
• Features:
  • No limit on the number of shareholders.
  • Shares are traded on stock exchanges (e.g., NEPSE in Nepal).
  • Must have at least 7 shareholders and 3 directors.
  • More transparency in financial reporting.
• Example: Large companies like Nepal Bank Limited, Ncell, or Himalayan Bank.

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Advantages of Joint Stock Companies

Here’s why businesses prefer this form:

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Disadvantages of Joint Stock Companies

No business form is perfect. Here are some challenges:

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How Shares Work in a Joint Stock Company

Shares represent ownership in a company. Here’s how they function:

Types of Shares

1. Equity Shares – Give voting rights and dividends (profit share).
2. Preference Shares – No voting rights but fixed dividends.

Example: Share Calculation

Suppose a company has 10,000 shares and makes a profit of Rs. 50,000.

• If it declares a 10% dividend, each share gets: $$\text{Dividend per share}=\frac{50,000\times 10}{100}=Rs.5,000\text{ total}$$ $$\text{Dividend per share}=\frac{5,000}{10,000}=Rs.0.50\text{ per share}$$

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Real-Life Example: Nepal’s Stock Market

Nepal’s NEPSE (Nepal Stock Exchange) is where public limited companies trade shares.

• Example Companies: Ncell, Himalayan Bank, Nepal Bank, NTC.
• How It Works:
  1. Companies issue shares to the public.
  2. Investors buy/sell shares on the stock exchange.
  3. Share prices rise/fall based on company performance.

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Comparison with Other Business Forms

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Exam Tip: How to Score Full Marks

1. Define Clearly: Always start with a proper definition of a joint stock company.
2. Differentiate Types: Explain private vs. public with examples.
3. Use Diagrams: Draw shareholder vs. management or stock exchange flow.
4. Calculate Dividends: Practice profit-sharing problems.
5. Compare with Other Forms: Show how it differs from sole trading or partnership.
6. Mention Legal Terms: Use words like limited liability, perpetual succession, common seal.

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NEB Board-Style Questions (Practice)

Short Answer (5 marks)

1. What are the three main features of a joint stock company? Explain each briefly.
2. Differentiate between private and public limited companies with two points each.

Long Answer (10 marks)

3. Explain the advantages and disadvantages of a joint stock company. Give two real-life examples from Nepal.
4. A company has 5,000 shares and declares a 15% dividend on a profit of Rs. 75,000. Calculate the dividend per share.

Case Study (8 marks)

5. Nepal Telecom (NTC) is a public limited company. Explain:
   • Why does it issue shares to the public?
   • What are the risks for shareholders?
   • How does it raise more capital if needed?

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Remember: Joint stock companies are big players in the business world. Understanding them helps in investing, managing, and even running a business in the future! 🚀