In this session, we will be discussing what is issue shares, and also the definition of shares, the meaning of shares, types of shares, why are shares issued by a company, benefits of investing in shares, what are advisory shares, what are fractional shares, what are outstanding shares, examples of shares.
What is the meaning of issue shares?
Shares are those types of character display in any of the business organizations, which units of equity ownership interest in a particular company or financial asset that exists as a financial asset providing for an equal distribution in any residual profits, if any are declared, in the form of dividends. Shareholders may also enjoy capital gains if the value of the company rises.
Most of the owners of the business organizations, whose have not the ability to invest as a whole capital of the company. They have announced shares. Shares make by the whole capital of the company are divided into small components. that is the power of share. In the whole world, 18 million investors invest their money in the shared market. Shares are also known as stocks.
In the session on what is the meaning of issue shares, we will be also discussing the types of shares.
The types of shares can be dedicated to the following points.
- Ordinary shares or equity shares
- Non-voting ordinary shares
- Preference shares
- Redeemable shares
Ordinary shares or equity shares: -In the whole world, most of the companies are, which have only one type of share, those types of shares we called ordinary shares. These types of shares have no special rights or restrictions. Ordinary shares are those types of shares, which are also known by the name of equity shares. These types of shares have the ability to give the highest financial profit but also have the highest risk. Ordinary shareholders are entitled to voting rights; however, they are the last to be paid if the company is wound up.
Non-voting ordinary shares: – The second one is the non-voting ordinary shares. No-voting ordinary shares are those types of shares, which haven’t authority to vote and are also not authorized to attend general meetings. These types of shares are usually given to employees so that remuneration can be paid as dividends for the purposes of tax efficiency for both parties.
Preference shares: – The third one is the Preference shares. Preference shares are those types of shares, which give their holder a preferential right to a fixed amount of dividend, meaning that they will receive dividends ahead of ordinary shareholders. Preference shares are those types of shares, which are also known by the name of Preferred stocks. Preferred shareholders also have a higher priority claim to the company’s assets in case of insolvency.
This means that a shareholder would not benefit from an increase in the business’ profits. However, usually, they have rights to their dividend ahead of ordinary shareholders if the business is in trouble. Preference shares carry no voting rights.
Redeemable shares: – The last one is Redeemable shares. Redeemable shares are those types of shares, which issued on the terms that the company will/may buy them back at a future date. The redemption date can either be fixed in advance (e.g., 3 years from the date the share is issued) or decided at the company’s discretion. these types of shares are done with non-voting shares given to employees so that the company can get its shares back if the employee leaves.
In the session on what is the meaning of issue shares, we will be also discussing why are shares issued by a company.
Why Do Companies Issue Shares?
You probably often read the news of a company becoming public or issuing shares to the public as IPO. An obvious question arises after reading this type of news is, why a company goes public or why does the company share its profit with investors when it can keep all the profit itself working as a private entity?
The answer to this question is, companies issue shares because they need more money to finance their expansion and to function efficiently.
The investor buying these shares gets part ownership in the company and the company gets the needed money which it can use for its operations.
Debt financing vs equity financing
A company can also take a loan from banks or can borrow by issuing bonds to raise this capital. This route of financing by taking credit or issuing bonds is ‘debt financing.’
While raising money by the issuance of shares is called ‘equity financing.’
In debt financing companies need to return the raised capital with interest payable on it. On the other hand, the fund raised through equity financing provides more freedom to use this capital as it does not carry interest on it. And this money does not need to be paid back.
Why do investors buy stocks?
In ‘equity financing’ companies raise money by selling part ownership of it in the form of shares to the investors.
Shares are the certificate of partial ownership in the company. Issuing shares to new investors decrease the ownership percentage of promoters and previous shareholders in the company.
Investors buying shares are the part owners of the business. They buy shares in the hope of the company becoming successful in the future so the price of their shares will appreciate.
Companies also share their profit with investors in the form of a dividend.
But being a partial owner of the business also exposes investors to the risk of the business not being successful.
Sometimes companies do not perform well. In that case, the price of their shares may drop in the stock market. Or even worse, a company can go bankrupt, in that case, investors can lose their entire invested capital.
Read also: Definition of portfolio
Types of shares company’s issue:
Companies can issue different types of shares as per their need. These shares come with varying rights to investors. ‘Common stocks’ and ‘Preference stocks’ are two commonly issued stocks.
When people talk about stocks, they are most likely referring to common stocks.
Common stocks represent the ownership in the company and come with voting rights of one vote per share (in most cases).
Common stockholders use their voting rights in some significant corporate matters to select board members and approving/disapproving of the proposed merger.
The company pays a dividend on the common stock, but it is not always guaranteed. However, in case of the business being successful, common stocks appreciate maximum in value.
But the other side of the coin is that if the company goes bankrupt, common stockholders will bear the maximum loss, as common stockholders have the last claim on the company’s assets after creditors and preference shareholders. In most cases, common stockholders lose their entire invested capital in case the company goes bankrupt.
Preferred stocks resemble bonds to some extent and do not come with voting rights (in most cases). Preferred stockholders are promised a fixed dividend, opposite to common stocks in which investors are not guaranteed a dividend (Most companies pay a small dividend or no dividend at all to common stockholders).
Another advantage of preferred stocks is, in case of bankruptcy preferred stockholders get a claim on the assets before the common stockholders (but after creditors). Preferred stockholders have a preference on dividends and on assets that’s why they are called preferred.
Preferred stocks may be ‘callable’ or ‘puttable.’ Some preferred stocks can be convertible that can be converted into common stocks.
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