What is Share Capital?
A share capital amount of money raised by issuing the share by a company. The shareholders are the owner of the company. The total share capital is divided into small parts and each part is called a share. Share is the smallest part of the total capital of the company. The share capital remains with the company as long the company runs.
Features of the Share Capital
- Share is a long term financial source of the company.
- Share capital is also called owned capital because shareholders are the owner of the company.
- Share provides substantial funds to the company.
- It gives its shareholders an opportunity to participate in the company’s management with the normal right of the shareholder.
- It gives benefit to shareholders
Types of Share Capital
- Equity Share Capital
- Preferences Share Capital
Equity Share Capital
- Equity share is also known as an ordinary share.
- Equity shareholders are the real owners of the company.
- They have the voting right in the AGM so they have control over the company.
- These shareholders take more risk than preference shareholder.
- The rate of dividend on these shares depends upon the profits of the company.
- Is cannot be redeemed during the lifetime of the company (remain permanently with the company).
- It is considered to be the riskiest investment,
- In case of the liquidation, the equity share capital will be paid last after the payment is made to creditors & preference shareholders.
Advantages and Disadvantages of Equity Share
|It is permanent source of capital.||As equity share can not be redeemed, there is danger of over capitalization.|
|Equity share do not create any obligation of paying fixed rate of dividend.||Equity shareholders can put obstacle for management by manipulation.|
|Shareholders have the right to vote for the selection os BOD.||During prosperous periods, higher dividend have to paid leading to increase the value of shares in the market and it leads to speculation.|
|In case of high profits, equity share holders are the real gainer.||Investors who desire to invest in safe securities with a fixed income have no attraction for such shares.|
Preference Share Capital
- A preference share is a long term source of finance for a company.
- It has a fixed rate of dividend. Shareholder carries a preferential right over ordinary equity shares in sharing of profits and also claim over assets of the firm.
- A preference share is also called “hybrid financing instruments” as it has elements of both equity share and debt.
- It has a fixed rate of dividend.
- The shareholder does not hold voting right.
- Just like debt, preference shares also have a fixed maturity period. On the date of maturity, the preference capital has to be paid to shareholders. (redeemable preference shares do not have maturity)
Advantages and Disadvantages Preference Share
|Helpful for raising long term capital for a company||Company have to pay fixed rate of dividend before paying other shares.|
|Rate of return in guaranteed.||No rights for voting and control power.|
|Redeemable preference share have the added advantages of repayment of capital whenever there is surplus in company.||Cost of raising preference share is comparatively high.|
What is Debenture?
A public limited company is allowed to raise debt or loan through debentures after getting a certificate of commencement of business if permitted by MOA. Unlike share capital, debentures are also part of the capital for a company issued to the public at a premium or at a discount.
Features of Debenture
- It is written documents
- Creditor-ship certificate
- Fixed maturity period
- Long term and major capital source
- No voting right and control in the management
- It is a cheap source of capital
Types of Debenture
- Redeemable and Irredeemable Debentures
- Secured and Unsecured Debenture
- Registered and Bearer Debenture
- Convertible and Non-convertible Debenture
Difference Between Share and Debenture
|The shares are the owned funds of the company.||The debenture are the borrowed fund of the company.|
|Share represents the capital of the company.||The debenture represents the debt of the company.|
|The holder of the shares is known as shareholders(owners).||The holder of the debenture is called debenture holder (Creditors).|
|Shareholders get dividend.||Debenture holders get interest.|
|Dividend has to be paid to shareholders only if company makes profit.||Interest has to be paid to debenture holder even if there is no profit of company.|
|Shareholders have voting right in AGM.||Debenture holder do not have voting right in AGM.|
|Shares can not be converted into debenture.||Debenture can be converted to shares.|
|Shareholder are risk taker.||Debenture holders are not risk taker.|
What is Bond?
Bond is a financial security issued by a company or by the government as a means of borrowing long-term funds.
A bond is debt investment in which an investor loans money to an entity (usually corporate or government) which borrows the finds for a definite period of time at a variable or fixed interest rate.
- Long term source of finance.
- Has fixed maturity period and interest rate.
- Issued by company, government, state, municipalities.
Difference between bonds and debenture
|Bond is a financial security issued by a company or by the government as a means of borrowing long-term funds.||A debt instrument used to raise the long term finance.|
|Generally secured by collaterals.||May be secured on unsecured.|
|Interest rate is low.||Interest rate is high.|
|Issued by Government agencies, corporations.||Issued by companies.|
|Accrued payment system.||Periodical payment system.|
|Called bond holders.||Called debenture holders.|
|It gets first priority in repayment at the time of liquidation.||It gets second priority in repayment at the time of liquidation.|