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Equity Shares
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Today, we'll discuss **Equity Shares**. Who can tell me what an equity share is?
I think equity shares are the common shares issued by a company, right?
Exactly! Equity shares do not have a fixed dividend. The dividends vary based on the profits of the company. Can anyone explain what that means?
It means that if the company doesn't make a profit, we might not get any dividends at all!
Correct! And since thereβs no guarantee of receiving a fixed amount, this can be riskier. But it also allows shareholders to vote in company decisions, which is a crucial part of their ownership.
Does this mean equity shareholders have more risk compared to preference shareholders?
Yes, and that's a great segue to our next topic! Let's summarize Equity Shares: they have no fixed dividend and holders can vote, but they face higher risks.
Preference Shares
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Now, let's move on to **Preference Shares**. Student_4, could you share what you know about them?
Preference shares have a fixed rate of dividend, right?
That's correct! Unlike equity shares, preference shareholders receive dividends before equity shareholders. What happens if the company faces liquidation?
Preference shareholders get paid before equity shareholders!
Exactly! Preference shares are less risky in that sense. However, they usually do not have voting rights. Let's summarize: Preference Shares provide fixed dividends and priority in payments.
Basic Terms in Share Issuance
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Moving on to some basic terms related to shares, starting with **Face Value**. What do you think it represents?
Isn't it the value printed on the share certificate?
Right! Itβs the original value. Now, what about **Issue Price**?
It can be at par, premium, or discount. So, if a share has a face value of βΉ10, it might be issued at βΉ12, which means it's at a premium.
Great example, Student_3! This leads us to 'Calls'. What do you understand by calls?
Calls are amounts that shareholders need to pay in installments, like when you apply for shares.
Exactly! They can be in stages such as Application, Allotment, First Call, and Final Call. Letβs recap: Face Value is the printed value, Issue Price can vary, and Calls are installment payments.
Introduction & Overview
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Quick Overview
Standard
In this section, we explore the two main types of shares issued by joint stock companies: Equity Shares, which do not guarantee fixed dividends, and Preference Shares, which offer fixed dividends and priority in payments. Basic terms such as Face Value and Issue Price are also discussed.
Detailed
Types of Shares in Joint Stock Companies
This section discusses the two primary types of shares that a joint stock company can issue: Equity Shares and Preference Shares.
- Equity Shares: These shares do not carry a fixed dividend; instead, dividends depend on the company's profitability. Shareholders are entitled to vote at company meetings.
- Preference Shares: These shares provide a fixed rate of dividend that must be paid before any dividends are paid to equity shareholders. They have priority in receiving dividends and also in the event of liquidation.
Basic Terms Involved in Shares
- Face Value: The nominal value of a share as defined in the company's articles - it's the value stated on the share certificate.
- Issue Price: The price at which shares are offered to investors, which may be at par (equal to face value), at a premium (above face value), or at a discount (below face value).
- Calls: Payments that are made by shareholders in installments. The different stages include Application, Allotment, First Call, and Final Call.
By understanding the types of shares, students will better grasp the foundational elements of equity financing and how joint stock companies manage shareholder capital.
Audio Book
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Equity Shares
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β’ Equity Shares: No fixed dividend. Dividend varies based on profit.
Detailed Explanation
Equity shares represent ownership in a company. Unlike traditional investments that pay a fixed return, equity shareholders receive dividends that depend on the companyβs earnings. If the company does well and makes a profit, shareholders may receive a higher dividend; if it does poorly, the dividend may be lower or not be paid at all.
Examples & Analogies
Imagine investing in a lemonade stand operated by your friend. You agree that if the stand makes good profits on a hot summer day, you will get a bigger share of the earnings. However, if the stand doesn't sell many lemonade cups or even incurs losses, you may receive less or nothing at all. This is like equity shares where dividends fluctuate based on company performance.
Preference Shares
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β’ Preference Shares: Fixed rate of dividend and priority in payment over equity shareholders.
Detailed Explanation
Preference shares provide shareholders with a fixed dividend, meaning they receive a set amount regularly, similar to how a bond pays interest. Additionally, in the event of liquidation or profit distribution, preference shareholders are paid before equity shareholders. This makes preference shares less risky compared to equity shares, as they have guaranteed returns.
Examples & Analogies
Think of preference shares like a loan you give to a friend to buy a bike. You agree that they will pay you back a fixed amount each month, and if they also get a job that allows them to earn money, they can pay their other friends back later. Here, you have a priority because you expected your fixed amount first before others receive any money or repayments.
Definitions & Key Concepts
Learn essential terms and foundational ideas that form the basis of the topic.
Key Concepts
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Equity Shares: No fixed dividends and voting rights.
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Preference Shares: Fixed dividends and priority in payments.
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Face Value: Nominal value stated on the share certificate.
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Issue Price: Price at which shares are issued.
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Calls: Payments made in installments by shareholders.
Examples & Real-Life Applications
See how the concepts apply in real-world scenarios to understand their practical implications.
Examples
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Example of Equity Shares: A company issues 1,000 equity shares with a face value of βΉ10. Dividend is declared at 10% in a good year, so each shareholder earns βΉ1 per share.
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Example of Preference Shares: A company issues βΉ1,00,000 preference shares with a fixed dividend of 8%. During the financial year, the company must pay βΉ8,000 to preference shareholders before paying any dividends to equity shareholders.
Memory Aids
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
π΅ Rhymes Time
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Equity's fickle, profits sway, Preference pays fixed, come what may.
π Fascinating Stories
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Imagine a bustling marketplace where sellers offer fresh fruits. Equity shareholders are the vendors hoping to sell their goods at varying prices based on demand, whereas preference shareholders are like a special group granted discounts, ensuring a steady return regardless of the market chaos.
π§ Other Memory Gems
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Remember E for equity and E for earnings that vary; P for preference and P for priority in payments.
π― Super Acronyms
FIC - Face value, Issue price, Calls
- Remember these three key terms for shares!
Flash Cards
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Glossary of Terms
Review the Definitions for terms.
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Term: Equity Shares
Definition:
Shares without a fixed dividend, where holdersβ dividends vary based on company's profits.
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Term: Preference Shares
Definition:
Shares with a fixed rate of dividend and priority in dividend payment over equity shareholders.
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Term: Face Value
Definition:
The nominal value of a share as printed on the share certificate.
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Term: Issue Price
Definition:
The price at which shares are offered for sale to investors.
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Term: Calls
Definition:
Instalment payments that shareholders must pay when purchasing shares.