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The term Ownership securities is also known as capital which represent shares Shares are the most universal form of rising long terms fund from the market The capital of a company is divided into a number of equal parts known a shares
1.Equity shares
Equity or Ordinary shares represent the ownership position in a company. The holders of ordinary shares called shareholders and are legal owners of the company. It is the permanent capital since has no maturity date. Equity shareholders get dividend after paying it to preference shareholders
Advantages
i. Equity shares do not create any obligation to pay a fixed rate of dividend ii. It can be issued without creating any charges over the assets of the company iii. It is a permanent source of capital iv. Equity share holders are the real owners of the company who have the voting rights v. In case of profits , equity shareholders are the real gainers.
Disadvantages
1. If only equity share are issued , the company cannot take the advantages of trading on equity. 2. As equity capital cannot be redeemed , there is a danger of over capitalization 3. Equity shareholders can put obstacles in management 4. During prosperous periods higher dividends have to be paid leading to increase in the value of shares in the market and speculation 5. Investors who desire to invest in safe securities
2.Preference share
According to Sec 85(1), of the Companies Act, 1956, a preference share is one, which carries the following two preferential rights: The payment of dividend at fixed rate before paying dividend to equity shareholders. The return of capital at the time of winding up of the company, before the payment to the equity shareholder.
Features
Maturity Claims on income Claims on assets Control Hybrid form of security
Advantages
Companys point of view:
1. No legal obligation 2. Long term capital 3. No liability of the company to redeem preference shares 4. Redeemable preference shares have the advantage of repayment of capital 5. Enhances the credit worthiness of the company 6. Do not carry voting right normally hence no dilution of control
Advantages
Shareholders point of view:
1. Earns a fixed rate of dividend 2. Superior security over equity shares 3. Provides preferential rights and repayment of capital at the time of liquidation
Disadvantages
Companys point of view:
1. It is an expensive source of finance 2. Cumulative preference shares become permanent burden 3. Frequent delays or nonpayment of dividend adversely affect the creditworthiness of the firm 4. While calculating tax preference shares dividend is non deductable
Disadvantages
Shareholders point of view:
1. As they do not have voting rights, they live under the mercy of the management 2. The rate of dividend is usually lower 3. Preference shareholders do not have charge on assets of the firm 4. The market price of preference shares fluctuates more
3.Deferred shares
These shares were earlier issued to promoters or founders for services rendered to the company Hence deferred shares are also known as founders shares These shares rank last so far as payment of dividend and return of capital These share generally have small denomination According to companies act, 1956 no public limited company or which is a subsidiary of a public company can issue deferred shares