A share capital is the amount raised by issuing shares by the company. The shareholders are the owners of the company. The total 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 as the company exists. However, the ownership of the company can be transferred to another.
Features of Share Capital
- Share is a long-term financial source of the company.
- Share capital is also called owned capital because shareholders are the owners of the company they invested in.
- Share provides substantial funds to the company.
- It gives its shareholders an opportunity to participate in the company’s management with the normal rights of a shareholder.
- It gives benefits to shareholders.
Types of Share Capital
- Equity Share Capital
- Preference Share Capital
Equity Share Capital:
- Equity share capital 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 the preference shareholders.
- The rate of dividend on these shares depends on the profits of the company.
- It can not be redeemed during the lifetime of the company (remains permanently with the company).
- It is considered to be the riskiest investment.
- In case of liquidation, the equity shareholders will be paid after the payment is made to creditors and preference shareholders.
Advantages and Disadvantages of Equity Shares
| Advantages | Disadvantages |
| It is permanent source of capital | As equity share can not be redeemed, there is danger of overcapitalization. |
| 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 of BoD. | During prosperous periods, higher dividend have to be paid leading to increase the value of share in the market and it leads to speculation. |
| In case of high profits, equity shareholders 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. Shareholders carry a preferential righ over ordinary equity shares in the sharing of profits and also have a claim over the assets of the firm.
- A preference share is also called a “hybrid financing instrument” as it has elements of both equity and debt.
- Preference shareholders get a fixed rate of dividend.
- The shareholder does not hold voting rights.
- Just like a debt, a preference share also has a fixed maturity period. On the date of maturity, the preference capital has to be paid to shareholders. (Redeemed preference shares do not have maturity.
Advantages and Disadvantages of Preference Shares
| Advantages | Disadvantages |
| Helpful for raising long term capital for a company. | Company have to pay fixed rate of return before paying other shares. |
| Rate of return is guaranteed. | No rights for voting and control power. |
| Redeemable preference share have the added advantages of repayable of capital whenever there is surplus in the company. | Cost of raising preference share is comparatively high. |
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