SHARES

Whenever a huge amount of capital is needed for investment, the concerned company secures it by issuing shares to the public. Shares are generally issued while starting the company. The following are the important points about shares:

  • The value of share depends upon the amount of money which it can fetch at the Stock Exchange.
  • It is one of the methods through which capital needed for a company is collected.
  • A share gives to the holder the right to claim a portion of profit and also share in the capital if the company is wound up.
  • It represents ownership of the assets of the company.
  • Share-holders can take part of the profits and are also liable to the loses to the extent of their investment in the share capital of the company.
  • Shares are movable property and are transferable.
  • Profits made by the company are calculated at the end of the year and distributed among the shareholders in proportion of their share values.
  • The amount to be collected through shares is decided by the company, during its formation.
  • Share can also be issued for reorganising and expanding the existing units of the company.
  • In case the company does not make profit, no dividend is paid to the shareholders.
  • Losses, if any, are adjusted against the profits made in the subsequent years.



SHARES CAN BE CLASSIFIED INTO THE FOLLOWING TYPES
PREFERENCE SHARES

The shares have preferential rights over the ordinary shares, in so far as divided and payment of capital in the event of the company’s liquidation is concerned. There are two categories in preference shares:

·        Cumulative
·        Non-cumulative

Only a fixed rate of dividend is permitted on these shares, irrespective of the extent of profit.

NON-CUMULATIVE PREFERENCE SHARES

Non-cumulative preference shares are those on which a fixed rate of dividend is paid in case of the company is in profit. The dividend is not transferred to the next year, if profit from any single year is insufficient to pay the fixed dividend.

CUMULATIVE PREFERENCE SHARES

In case, profits are not sufficient to pay the fixed dividend in any particular year, the deficit is paid up from the profits earned in the next year.

ORDINARY OR EQUITY SHARES

Next in the importance to preference shares, are the ordinary shares. The holders of such preference shares get a dividend only after it is paid to the shareholders possessing shares. There is no fixed limit on the extent of their dividend. They are paid according to the profits earned by the company. In case the company earns large profits, the ordinary share-holders get high dividend : sometimes even higher than what is paid to the preference shareholders.

DEFERRED SHARES

These shares are allotted to the promoters of the company. The holders of these shares get their dividend after making the payment of dividend to all the other types of shareholders. That is to say that this class of shareholders are given the last priority for the payment of dividend. The holders of these shares, however, posses exceptional voting rights.

DIFFERENCE BETWEEN SHARES AND DEBENTURES

Shares

Debentures
1.
Shares form the capital of the concern.
Debentures do not form the capital of the company. They form only credit money.
2.
Shareholders have to bear the losses and can also take part in the profit.
Debenture holders get interest on their money irrespective of losses or profits to the company.
3
Shareholders possesses voting rights.
Debenture holders do not possess voting rights.
4
Shareholders exercise control over management.
No control over the management.
5
Risk in investment.
No risk in investment, Repayment is guarantee.
6
The value of shares is generally small.
The value of debentures is generally high.
7
Shareholders get share in profit.
No share from profit. They get a fixed rate of interest, irrespective of loss or profit.


DEBENTURES


When finance is required for expansion and development of a company it can raise capital through loans instead of issuing more shares. The company can issue debentures and obtain credit. A debenture is a bond of indebetedness, issued by the company for a specific amount. The debenture holders get a fixed rate of interest payable after a fixed period of time. The debentures also specify the method of payment of interest. They do not form a part of the company’s capital. Debenture holders do not exercise any control over the management of the company. In case of liquidation, debenture holders are the first to get back their investment in preference to any of the shareholders.