Types of Shares:
There are two types of shares. They are
1. Equity Shares
2. Preference Shares
Equity shares
We also know equity shares as ordinary shares. These shares have voting rights. Equity share is a main source of finance for any company giving investors the right to vote, share market profits, and claim on assets.
Features of equity shares
1. They are permanent.
2. Equity shareholders are the actual owners of the company and they bear the highest risk.
3. Equity shares are transferable. i.e. ownership of equity shares can be transferred with or without consideration to other people.
4. Dividend payable to equity shareholders is an appropriation of profit
5. Equity shareholders do not get a fixed rate of dividends.
6. They limit the liability of equity shareholders to the extent of their investment.
Advantages of Equity Shares
1. Equity shares do not create any obligation to pay a fixed rate of dividends.
2. Equity shares can be issued creating no charge over the asset of the company.
3. It is a permanent source of capital and the company has to repay it except under liquidation.
4. Equity shareholders are the real owners of the company who have voting rights.
5 With profits, equity shareholders are the real gainers with increased dividends and appreciation in the value of shares.
Disadvantages of Equity Shares
1. If only equity shares are issued, the company cannot take advantage of trading on equity.
2. As equity capital cannot be redeemed, there is a danger of overcapitalization.
3. Equity shareholders can put obstacles for management by manipulating and organizing themselves.
4. During prosperous periods, higher dividends have to be paid to lead to an increase in the value of shares in the market, and it leads to speculation.
5. Investors who desire to invest in safe securities with a fixed income have no attraction for such shares.
Preference Shares
Preference shares are those shares that carry certain special or priority rights. First, dividends at a fixed rate are payable on these shares before they pay any dividend on equity shares.
Second, at the time of the winding-up of the company, it repays the capital to preference shareholders before the return of equity capital.
Features of Preference Shares
1. Preference shares are a long-term source of finance.
2. The dividend payable on preference shares is higher than the debenture interest.
3. Preference shareholders get a fixed rate of dividends irrespective of the volume of profit.
4. We know it as the hybrid security because it also bears some characteristics of debentures.
5. The preference dividends tax in India is not tax-deductible expenditure.
6. Preference shareholders do not have any voting rights.
7. Preference shareholders have the preferential right for repayment of capital in case of the winding-up of the company.
8. Preference shareholders also enjoy a preferential right to receive the dividend.
Advantages of Preference Shares
1. The earnings per share of existing preference shareholders are not diluted if fresh they issue preference shares.
2. Preference shares increase the earnings of equity shareholders, i.e. it has a leveraging benefit.
3. Preference shareholders do not have any voting rights and hence do not affect the decision making of the company.
4. The preference dividend is payable only if there is profit.
Disadvantages of Preference Shares
1. The preference dividend is not tax-deductible and hence it is costlier than a debenture.
2. With a cumulative preference share, the arrear dividend is payable when the company earns a profit, which creates a huge financial burden on the company.
3. Redemption of preference share again creates a financial burden and erodes the capital base of the company.
4. Preference shareholders get dividends at a constant rate and will not increase even if the company earns a huge profit, which makes this form of finance less attractive.
5. Preference shareholders do not enjoy voting rights and hence their fate is decided by the equity shareholders.
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