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Meaning of shares

A unit of ownership that represents an equal proportion of a company's capital. It entitles its holder (the shareholder) to an equal claim on the company's profits and an equal obligation for the company's debts and losses.

Characteristics
Ownership in the Company Participation in Corporate Success (dividend) Limited Liability Voting Rights Types of shares Equity shares Preference shares Deferred shares Bonus shares

Equity shares: These shares are also known as ordinary shares. They are the shares which do not enjoy any preference regarding payment of dividend and repayment of capital. They are given dividend at a fluctuating rate. The dividend on equity shares depends on the profits made by a company. Higher the profits, higher will be the dividend, where as lower the profits, lower will be the dividend. Preference shares: These shares are those shares which are given preference as regards to payment of dividend and repayment of capital. They do not enjoy normal voting rights. Preference shareholders have some preference over the equity shareholders, as in the case of winding up of the company, they are paid their capital first. They can vote only on the matters affecting their own interest. These shares are best suited to investors who want to have security of fixed rate of dividend and refund of capital in case of winding up of the company. Deferred shares: These shares are those shares which are held by the founders or pioneer or beginners of the company. They are also called

as Founder shares or Management shares. In deferred shares, the right to share profits of the company is deferred, i.e. postponed till all the other shareholders receive their normal dividends. Being the last claimants of the profits, they have a considerable element of speculation or uncertainty and they have to bear the greatest risk of loss. The market price of such shares shows a very wide fluctuation on account of wide dividend fluctuations. Deferred shares have disproportionate voting rights. These shares have a small denomination or face value. Deferred shares are not transferable if issued by a private company. Deferred shareholders do not enjoy the right of priority to have shares offered in case of the issue of shares by the company. If the company goes into liquidation the deferred shareholders can get refund of capital and participate in the surplus capital, if any, after the rights of preference and equity shareholders have been satisfied. Bonus shares: The word bonus means a gift given free of charge. Bonus shares are those shares which are issued by the company free of charge as bonus to the shareholders. They are issued to the existing shareholders in proportion to their existing share holdings. It is a kind of gift to the shareholders from the company. It is bonus in the form of shares instead of cash. It is given out of accumulated profits and reserves. These shares have all types of preferences which are available to the existing shares. For example. Two bonus shares for five equity shares. The issue of bonus shares is also termed as capitalization of undistributed profits. Bonus shares are a type of windfall gain to the equity shareholders. They are advantageous to the equity shareholders as they get additional shares free of cost and also they earn dividend on them in future.

Common Shareholders' Six Main Rights


1. 2. 3. 4. 5. 6. Voting Power on Major Issues Ownership in a Portion of the Company The Right to Transfer Ownership An Entitlement to Dividends Opportunity to Inspect Corporate Books and Records The Right to Sue for Wrongful Acts

Right of debenture holder

To receive interest/redemption in due time. To receive a copy of the trust deed on request. To apply for winding up of the company if the company fails to pay its debt. To approach the Debenture Trustee with your grievance. Right to transfer securities

Equity Financing vs Debt Financing Debt Financing


Debt financing means taking out a loan (money that is to be paid back over a certain period of time, usually with interest). Debt financing is either short term (the loan is to be repaid in less than a year) or long term (the loan is to be repaid in more than a year). Lending parties will also look closely at the business's debt-to-equity-ratio. When taking out a business loan, the only obligation of the business is to repay the loan according to the terms that were agreed upon. The lending party does not gain ownership in the business. Many lending institutions require the owner(s) of smaller businesses to personally guarantee the loan. In such a case, the commercial loan becomes the same as a personal loan. If you are starting a home based business and are looking to take out a commercial loan, then you will be definitely be asked to personally guarantee the loan.

Advantages of Debt Financing


The biggest advantage of debt financing is that the lending party does not gain any part of ownership of your business and your only obligation to lending party is to repay the debt. Also, repayment of the loan is typically a fixed expense, according the terms of the loan.

Dis-Advantages of Debt financing


The biggest dis-advantage is that the business will not have all of its cash flow available to do business. Also, the interest that is owed can be high.

Equity Financing
Equity financing is when you (the business owner) sell an ownership interest in your business in exchangefor money. The business owner and the investor(s) shares the business and the risks that come with it. Equity financing is a form of financing your business without incurring debt. With equity financing you don't have to take out a loan since the funding is already coming from an investor in exchange for a piece of ownership in the business. Many small and growth-stage businesses use equity financing as a source of funding. There are many sources of equity financing including nonprofessional investors such as family and friends, employees, etc. The most common source, however, are professional investors known as venture capitalists.

Advantages of Equity Financing


The major advantage of equity financing is that the cash flow that would have been used to repay theloan, can be used to grow the business.

Dis-Advantages of Equity Financing


The major dis-advantage of equity financing is the loss of interest of ownership of your business and also the possible loss of complete control that can accompany a sharing of business ownership with investors.