Money Making Equities ( Shares) Base on Srilanka
What are the Equities (shires)
- A share in a company is one of the units into which the total share capital of a company divided. In simple words,
- A share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company.
- A share is issued by a company or can be purchased from the stock market
- The place used for the trading share is called a share market.
- The holder of such share in the company is known as a shareholder. (owner)
Why Do Companies Issue Shares?
Mainly their Companies issue shares to raise money from investors who tend to invest their money. And This money used by the companies for Development and Growth.
Types of Equity (Shares)
Equity/ Ordinary Equity(Shares)
Definition: – is defined as shares of a company that give shareholders the right to vote in the company’s meeting and also an income in the form of dividends from the corporation’s profits
Important features of Equities( Shares)
- No Maturity Period
- Right to Control
- Voting Rights
- Claim on Asset
- Claim on Income
- Limited Liability
The Advantages of Ordinary/ Equities (Shares)
- High return
- Easily transferable
- Right to vote
- Right to choose directors
The Disadvantages of Ordinary Shares are as follows:
- High risk
- In worst cases, less privilege is given to equity shareholders
Preference Equities (Shares)
- As the name suggests, these shares have some preferences as to compare other types of shares. These shares give two types of preferences,
- Payment of dividend
- Repayment of capital at the time of liquidation
- A fixed-rate dividend is paid on preference share capital.
- Preference shareholders have no voting rights; so, they
- have no say in the management of the company.
Basis of Cumulating Dividend
- Under the basis of cumulating dividend preference shares can divide into two types. They are,
- Cumulative preference shares– These shareholders have a right to claim dividend for those years also for which there are no profits.
- Non- cumulative preference shares- Those shares that provide the shareholder fixed dividend amount each year from the company’s net profit.
Basis of Participation
- These participation preference shares also have two types. They are,
- Participating preference shares- The holders of these shares participate in the surplus profits of the company.
- Non- participating preference shares- They do not have such rights to participate or claim for a part in the surplus profits of the company
Basis of Convertibility
Convertible preference shares
Convertible preference shares are those shares that can be converted into equity shares within a certain period.
Non – convertible preference shares
These are shares that do not carry the right of conversion into equity shares.
Features of Equities (Shares)
Meaning: – Total share capital of a company is divided into many units of small denominations. Each such unit is called a share
- Proof of title
- Face value
- issue value Paid-up value
- Distinctive number
The procedure of issuing Equities (shares) in a company
A company must submit a copy of its prospectus to the securities and exchange commission before the date of publication. Private companies or public companies that issue shares privately do not need to issue an expectation
Application of shares
After receipt of the invitation, interested investor candidates can submit their application through a prescribed form.
Allotment of shares
The directors of an issuing company with a consultation with the stock market authorities prepare to sell shares to an applicant, they communicate through an allotment letter
Call on shares
There’s first call. second call and so on, depending on the number of instalments. The last call includes the word ‘final’’.
- Inform your stockbroker of the name of the company, price and amount of shares you want to purchase.
- The stockbroker will try and match your order
- Getting brought note
- Inform your stockbroker about the stock you wish to sell and the name of the company, the price and the number of shares to be sold.
- The stockbroker will try to match your order in the market.
- If your order is not matched, he will inform you and negotiate a suitable price. Once the order is matched, it will be processed
- Getting sold note
Terms used in Accounting for Equities (Share) Capital
- Prospectus: It is an invitation to the public for the subscription of shares or debentures.
- Capital: In the case of company money is contributed by the public and people who contributed money are called shareholders.
- Share Capital: Capital raised by the issue of shares is called Share Capital.
- Authorized Capital: Also called Nominal or registered capital. It is the maximum amount of capital a company can issue. It is stated in MOA.
- Issued Capital: This is part of authorized capital which is offered of the public for subscription. It cannot exceed authorized capital.
- Called Up Capital: It is the amount of nominal value of shares that have been called up by the company for payment by the subscriber towards the share.
- Paid Up Capital: It is part of called up capital that the members of the company or shareholders have paid.
- Reserve Capital: It is a portion of uncalled share capital that can e called only in case of winding up.
- Capital Reserve: It is capital profit not available for distribution as dividend.
Advantages & Disadvantages of issuing Equities (shares)
Advantages of issuing Shares
- Shares are investments in the company: when a shareholder purchases the shares of a company, he/she is investing in the company. The company can then use this money to expand and grow to give the investor a return on the investment.
- Shares are not a debt to the company: unlike a bank loan or a bond, the company does not have any repayment requirements when it comes to shares. Profits can be distributed as dividends, but if the company is liquidated, there is no requirement to pay the shareholders out.
- The company can use the money in any way it wants: a creditor can limit the way that a company uses the money he/she invests, however, there are no stipulations attached to shares and how the shares must be spent.
- Lowers the risk of the company becoming bankrupt
Disadvantages of issuing Shares
- Dilutes company ownership: when a company issues shares, it is reducing its control over the company and how it functions.
- Risk being bought out: a competing company could purchase the shares of the company, resulting in a hostile takeover aimed at running the company out of business.
- The price of risk: shareholders often demand a higher rate of return than creditors due to the risk they are taking by investing in a company that will not pay out if it becomes bankrupt.
- Cannot deduct dividends from taxes: interest paid to creditors can be deducted from the tax of the company, however, dividends paid out to shareholders cannot be deducted from the tax of the company.
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