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
Advantages | Disadvantages |
---|---|
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
Advantages | Disadvantages |
---|---|
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
Shares | Debentures |
---|---|
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.
Features
- Long term source of finance.
- Has fixed maturity period and interest rate.
- Issued by company, government, state, municipalities.
Difference between bonds and debenture
Bonds | Debentures |
---|---|
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. |