securities for creditorship capital)
These are ownership securities. Shares bestow certain advantages
to both the issuing companies and the investors. Investment in
this financial instrument is of long term nature. This, however,
does not mean loss of liquidity for the investor. Depending upon
availability of investors' interest in the company, shares can be
easily converted into cash in the secondary market.
bears the highest risk in the company's operations. Conversely, he
is also entitled to participate in the earning and wealth of the
company without limit. Issue of shares is of advantage to the
company, as payment of dividend is discretionary. Equity is not
required to be refunded. This instrument is quite popular with
individual investors in India.
Face value of
ordinary shares in India can be any amount from Re. 1 to Rs. 1,000
but the most common denomination of shares is Rs 10.
A preference share (PS) is said to be a hybrid financial
instrument. Companies have issued preference shares with a large
number of innovations. PS, as its name suggests, is an ownership
security, but unlike an ordinary share where dividend is
discretionary, PS carries a fixed rate of return (dividend) like a
debenture. In order of preference, PS holders rank below the
claims of creditors of the company, but above those of ordinary
types of preference shares are normally available in the market:
(a) Cumulative and non-cumulative
(b) Convertible and non-convertible
(c) Redeemable and non-redeemable
(d) Participating and non-participating
In case of Cumulative PS, the dividend(s), if not paid in any
period(s) are accumulated as a liability of the company and has to
be paid subsequently.
PS can be converted into ordinary share on terms and condition
fixed at the time of issue of such shares.
preference shares have fixed period of maturity and are repayable
at the end of that period. It is because of this property. Such PS
are regarded more as a debt instrument than an ownership security.
preference shareholders have the best of both the worlds in as
much as they are not only entitled to a fixed rate of dividend,
but can also expect to earn a higher dividend in case the company
makes good profits.