SHARES - Meaning , features , Types , Merits , Demerits , lets--study

 SHARE MEANING:-
A share is an instrument used by companies to raise funds .Share is a part of capital divided into small units , each unit is called A share . share represents a unit of equity ownership in a company. Shareholders are entitled to any profits that the company may earn in the form of dividends. They are also the bearers of any losses that the company may face. In simple words, if you are a shareholder of a company, you hold a percentage of ownership of the issuing company in proportion to the shares you have bought.

TYPES OF SHARE 

EQUITY SHARES (Risk Capital.)...
Equity shares are those shares on which no special privilege is attached. In other words, all the shares, except preference shares, are called equity shares.The equity shareholders are eligible to get dividends after payment of dividends to preference shareholders, In the case of equity shareholders, the rate of dividend is not fixed. The rate of dividend depends on the amount of profit of the company.Therefore, equity shares are much more speculative in nature than preference shares. That is why equity shares have been called risk capital.

ADVANTAGES OF EQUITY SHARES
The advantages of equity shares may be discussed from two
Viewpoints from the point of view of shareholder
(1) High dividend: The equity shareholders may get high rate ofdividends if the company functions well and runs profitably.
 (2) Voting rights: The equity shareholders enjoy voting rights. They have rights to elect directors and management of the company.
(3) Appreciation in the value of shares: The good will of the company increases if the company operates profitably . As a result, the market value of equity shares will increase. Thus, the equity shareholders enjoy capital appreciation in the value of their shares. 
(iv) Higher returns in boom periods: Equity shareholders are rewarded by handsome dividends and appreciation in the value of their shareholdings under boom condition. Equity shares are thus preferred by adventurous investors.
(v) Possibility of getting bonus shares: Equity shareholders may get bonus hares, provided the company earns a huge amount of profit and it intends to capitalise its reserves.
(vi) High liquidity of invested funds: Equity shareholders may sell their shares in the stock market to get liquid funds in case of emergency or when they are not satisfied with the activities of a company. (vii) Profitable during inflation: In periods of inflation, it seems more profitable to invest money in equity share, instead of making deposits in the bank or other financial institutions.

(2) From the point of view of the company
 (i) Permanent capital: Equity share capital is the permanent capital because it is not redeemable during the life-time of the company. The question of refund of capital arises only when a company goes into liquidation
(ii) No mortgage of assets: Equity shares are issued without any security on assets. In this way, the company procures funds without any charge on its assets. 
(iii) No fixed obligation to pay dividend: The rate of dividend is not high rates in guaranteed on equity shares. Dividends may be paid at very cases of sufficient profit and vice versa.
(vi) Making a company financially sound: The company is not forced to pay equity dividends. It helps the company to maintain sufficient reserves and to build itself up financially.
(v) Diffusion of risk: This is considered as the best way of diffusion of risk. The equity shareholders are large in number. If the company suffers losses, the risk of loss can be distributed among a shareholders.
 (vi) Capacity to raise further capital: Equity share capital raises the capacity of the company to procure additional capital in case of need.

DIS-ADVANTAGES OF EQUITY SHARES

Equity shares have certain limitations which may be discussed from two view points, as follows:
 (1) From the viewpoint of shareholders
(i) Uncertainty of earnings: Equity shareholders may not get any dividend in the years of losses or lower profits. 
(ii) High risk: Equity shareholders bear a high degree of risk associated with the fluctuation in the market prices of equity shares.
(iii) Less preferred by cautious investors : Cautious investors d not prefer to invest in equity shares because returns on these shares are not regular and guaranteed
(iv) Inability to participate in the management: Most of the equity shareholders are practically not in a position to participate in the management of the company as they are usually scattered.
(v) Less refund of capital :-Equity shareholders may get little or nothing at the time of liquidation, because they are repaid from the surplus, at the last stage only.
 (vi) No control over dividend: Equity shareholders cannot influence the rates of equity dividend as proposed by the Board of Directors.

(2) From the point of view of the company 
(i) High cost of finance: Raising of funds by the issue of equity shares is a time consuming and high cost related matter. 
(ii) Danger of over-capitalisation: There is a scope for over- capitalisation, as equity share capital cannot be redeemed in case of surplus funds.
(iii) Danger of manipulation of dividends: The management of the company may declare dividends at higher and lower rates. This will cause fluctuations in the market value of shares. There is always danger of manipulation.
(iv) Manipulation by a powerful group: As the affairs of the company are controlled by equity shareholders on the basis of voting rights, there are chances of manipulation by a powerful group.
(v) Concentration of power in a few hands: Whenever the company intends to raise capital by new equity issues, priority is usually given to existing shareholders.

PREFERENCE SHARES

Preference shares are those shares to which some preference is attached in terms of
(a) Payment of dividend, or
(b) return of capital (c) both in the first case,
the preference shareholders are entitled to receive a fixed rate of dividend before the dividends given to equity shareholders. In the second case, preference shareholders are entitled to get back their capital in priority to equity share holders in the event of liquidation of the company. In the third case, preference shareholders enjoy preferential rights, both with respect to payment of dividend and return of capital (on liquidation of the company).

TYPES OF PREFERENCE SHARES

(1) Cumulative preference shares: Preference shares are cumulative where the preference dividend, if not paid in one year, is carried forward to succeeding years. These shares have a right to claim dividend for those years also for which there were no profits. The dividends goes on cumulating unless it is otherwise paid. The holders of these shares are entitled to get first the arrear dividend out of future profits prior to any other shareholders.

(2) Non-cumulative preference shares: The holders of these shares have no claim for the arrears of dividend. They are paid a dividend if there are sufficient profits. These shareholders cannot claim arrears of dividends in subsequent years. 

(3) Redeemable preference shares: The holders of redeemable or at the option of the company, as may be mentioned in the Articles of Association. The preference shares to be redeemed must by fully paid up, preference shares can get back their capital on the expiry of a certain period The company can redeem preference shares either out of profits or out of a fresh issue of share capital.

(4) Irredeemable preference shares: The preference shares that cannot be redeemed unless the company is liquidated are known as irredeemable preference shares.

(5) Participating preference shares: These shareholders are entitled to participate in the surplus profits of the company in addition to their usual fixed rate of dividend, Thus, participating preference shareholders obtain returns on their capital in two forms: (a) Fixed dividend, and (b) Share in the excess profit. This is an attraction topopulanse preference shares. 

(6) Non-participating preference shares: Preference shares or which only a fixed rate of dividend is paid, are known as non-participating preference shares.

(7) Convertible preference shares: Sometimes preference shareholders may be given the right to convert their preference shares into equity shares within a stipulated period. These preference shares are known as convertible preference shares.

(8) Non-convertible preference shares: These shareholders are not given the right to convert their preference share into equity shares. 

ADVANTAGES OF PREFERENCE SHARES

The advantages of preference shares may be discussed from two

viewpoints as follows:

(1) From the point of view of shareholders

 (i) Preferential right to receive dividend: Preference shareholders enjoy preferential right with regard to the receipt of dividend. Payment of preference dividend is made before the payment of equity dividend.

 (ii) Repayment of capital: Preference shareholders are entitled to get back their capital in priority to equity shareholders in the event of liquidation of the company.

(iii) Fixed rate of dividend: The rate of preference dividend is fixed It cannot be reduced even at the moment when company suffers losses .

(iv) Less risks: The investors can invest without any anxiety in the capital. There exists a certainty about getting a fixed amount of dividend. Th risk associated with this investment is less.

(v) Cumulative dividend: In case of cumulative preference shares. the arrears of dividend (if any) also accumulate.

(vi) Right to be redeemed: In case of redeemable preference shares, the company can utilise surplus funds to redeem such shares.

 (2) From the point of view of the company

1) Capital without creating any charge: The company can raise capital by issuing preference shares for a long period without creating any charge on its assets. No charge over was atters

(ii) No loss of control: Preference shareholders do not have any voting rights and they cannot participate in the management of the company, Therefore, financing through preference shares does not involve any risk of loss of control of management (No voting rights)

(ii) Cheaper modes of finance: Financing through preference shares is cheaper as compared to financing through equity shares.

(iv) Cushion to the debenture holders: Preference share capital is a sort of cushion to the debenture holders. They save the company from paying higher rates of interest. 

(v) Strengthening financial position: Preference shares add to the equity base of the company and thereby strengthen its financial position. Additional equity base enhances the ability of the company to borrow more in future.

(vi) Long maturity: Preference shares have long maturity dates. Preference shares give sufficient flexibility to the company for repayment of principal.

DISADVANTAGES OF PREFERENCE SHARES

The limitations of preference shares may be discussed form two viewpointas follows: 

 (1) From the point of view of shareholders

(i) Restricted voting rights: Preference shareholders do not have any voting rights except at their class meetings. Moreover, they do not participate in the management of the company.

(ii) Deprived of capital appreciation: Preference shareholders do not get any capital appreciation in the value of their shares as in the case with equity shares. 

(iii) Deprived of increased rate of dividend: The rate of preference dividend is fixed. Preference shareholders do not get increased rate of dividend even at the moment of huge profits of the company.

(iv) Unattractive during boom period: Investors do not prefer preference shares during boom periods, especially when investors are ready to take risks for higher returns. 

(2) From the point of view of the company

(1) Permanent burden: Preference shares impose a permanent burden on the company, especially when the company incurs losses.

ii) Costly method of raising finance: The cost of raising preference share capital is higher as compared to debentures and Government securities.

(iii) Compliance with certain conditions: Preference shareholders provide capital to the company, subject to certain conditions. Compliance with these conditions is a hard task for the company.

(iv) Pave the way for insolvency of company: Preference shares may pave the way for the insolvency of the company as the company has to pay dividend even if it incurs loss. This is an absolutely unbearable butden

CONCLUSION

Share is a small unit of capital of the company . Share's are most important part of capital structure.Share's are used as a source of finance for company. Share's are 2 types EQUITY and PREFRENCES shares. Share helps in allocating savings to investments. By shares a company gets funds and people get dividend  from the investment.

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