Basics About Equity Shares And The Preference Shares
Equal distribution in the profit will be provided to the person who has incorporated the shares and they become one of the owners of the company. Now we will learn more about the basics about the equity shares and the preference shares.
- A) Equity shares
It is also called ordinary shares and the shareholder is considered as the part or the fraction of the ownership, which have to take the maximum risk of the business. The equity shareholders are the members of the company and they have the right to vote. These shares are used to raise the long-term capital.
Ownership capital or fund is considered to be raised from the ownership of the equity share. They are considered to be the foundation of the company.
Based on the earnings from the company the shareholders are paid and they will not give the fixed dividend and referred to as residual owners. They will be provided with what has been left after the claims of the income. In the management of the company, shareholders can participate.
Merits of equity share
1) The foundation of the company capital is the equity share and it is on the list of claims and acts as a cushion for creditors.
2) It gives credit to the company and confidence to loan providers.
3) The investors who want high returns in spite of taking the risk can prefer equity share.
4) There is no charge for creating the fund.
- B) Preference shares
The share which provides fixed dividend is called as the preference share and their payment will be given the priority over ordinary dividend. Capital raised from this is called preference share capital.
These shareholders are superior to the equity shareholders by means of two ways. One is from the profit of the company they will receive the fixed dividend before the equity shareholder and another one is at the time of liquidation they will receive their capital.
Types of preference shares
1) Cumulative and noncumulative
The unpaid dividends can be collected by the preference shares and during the year if it is not paid is called as cumulative preference share. If the dividend is not accumulated by not paid in a year, is called as the noncumulative shares.
2) Participating and non participating
Those who have the right in the profit of the company are called as the participating preference share and those who cannot enjoy the rights of profit is called nonparticipating preference shares.
Merits of preference shares
1) It has the steady income and safe to invest.
2) Provides a fixed rate of return with low risk.
3) No charge on assets of the company.
4) It will not affect the management control of the equity shareholders.