Understanding Shares And Share Types

University:
California State University, Northridge
Course:
BUS 104 | Introduction to Business
Academic year:

2023
Views:

69

Pages:

1
Author:

JJIssac

UNDERSTANDING SHARES AND SHARE TYPES At its most basic level, a share represents a portion of ownership in a company. It serves as evidence that an investor has liability for the business's debts but also entitles them to potential dividend payouts or a claim on profits down the road. Share certificates are issued under the company seal to track shares as movable property that can be freely transferred. There are two main share classes defined by law - preference shares and ordinary shares. Preference shareholders get preferential treatment over ordinary shareholders as it relates to dividends and repayment of capital if the company is wound up. Some preference share variations include cumulative shares that accrue unpaid dividends, participating shares with additional profit rights, and convertible shares that can switch to ordinary shares. Meanwhile, ordinary or equity shares make up the residual claim on any profits left over after paying preference shareholders. They also hold voting power proportional to share amounts. Some companies offer deferred shares to founders that defer profit-sharing until other shares are paid out fully but come with extra voting power. Understanding Debentures Debentures represent an acknowledgment of corporate debt. They are essentially IOUs or bonds sold by companies to investors as a means of raising capital, with interest paid periodically at a fixed rate and the principal repaid on a future maturity date. Debentures can be registered to specific holders or bearer instruments passed by delivery alone. Some carry security over company assets while others are unsecured. Redeemable debentures must be repaid by the company, whereas perpetual debentures only become repayable if the firm is liquidated. Convertible debentures may switch to shares after a set period. Factors Influencing Decisions Financing Many considerations go into determining the optimal sources and methods of financing. Project timelines, business nature, industry risk level and more all factor in. Longterm projects requiring large upfront sums tend to fit equity or long-term debt best. High risk ventures may struggle for bank loans and pay higher interest. Overall, the right financing mix depends on weighing these various business and economic factors for a given company's circumstances.