If you are planning to build a joint stock company, you should also start preparing for the complexity of its finances. Gathering finances and using them in the best way possible demands a lot from the entrepreneur when it comes to running a full-fledged business organisation.
There are several issues that you would have to tackle with in order to successfully run a business enterprise – be it buying the best media platforms, making development plans, planning marketing campaigns or simply keeping a tap of all the financial transactions.
Out of all these activities, the most difficult to handle is the issue of generating capital. In the case of joint stock companies, the initial capital itself is so huge that hardly anyone can afford to put all that money by themselves. There have been firms that take help of banks and alternative finance platforms for borrowing their start-up capital, but it is generally never enough.
The Concept Of Shares
Shares are issued by a company when the entrepreneur is not able to raise the entire capital by themselves. Here, the capital is broken down into smaller divisions called ‘shares’ which are made available to the general public for getting a stake in the company.
Once a person buys shares of a company, they technically become co-owners of the same along with various other shareholders. However, concentration of power would always remain with the top core and people have more number of shares will have an upper hand in the management.
The concept of issuing shares has also resulted in a business not being liable to pay anyone if it runs into losses. As the shareholders are part owners of the company, they are not entitled to any dividend if the company is not able to make profits. This gives considerable financial cushioning to the firm when the times are rough.
The most common types of shares issued by a business organisation are the equity shares. These are the shares which are easily transferable and are highly volatile. Equity shareholders are not entitled to any fixed income and they are paid dividend in the end after the firm pays off other obligatory expenses (preference shares/debentures).
However, equity shares can also show a huge jump in their value of the company does really well in the market. If your firm earns a huge profit, your equity shareholders would be rewarded with a much higher dividend than expected. This is why investing into equity shares is often compared to gambling.
These shares are opposite of the equity shares. They are issued with a promise of paying a specific dividend regularly, provided that the company is making enough profit.
Preference shareholders are paid their dividend before the ones holding equity shares. Also, these shareholders are given preference regarding the repayment of capital in case of liquidation.
There are various advantages of having preference shares over equity shares. Some of them are briefly explained here:
No Economic Burden
Preference shares pose no unnecessary economic burden on the company. As the amount to be distributed is kept fixed, there is clarity of repayment and if there is a huge profit, the balance can be put to a better use (development and production of the firm).
Also, there is no compulsion for the company to pay their preference shareholders if it has not been able to make decent profits. This further reduces the burden off the entrepreneur’s shoulders.
Aids Trading On Equity
The issue of preference shares can influence the rate of equity dividend to be paid to the shareholders. This is because the amount to be paid to preference shareholders is fixed (and not high in value). Therefore, the surplus after paying off preference shareholders can be declared in the form of dividend or can be ploughed back as retained earnings.
No Difference In Controlling Rights
Unlike equity shares, the issue of preference shares does not affect controlling rights of your firm as these shareholders have no voting rights. No matter if a person has one preference share or a hundred; they would not be able to influence the decision making of the business.
Preference shares can also be issued to attract investors to invest in your venture. The majority of the investors would prefer investing in preference shares as the amount of returns is fixed and they are paid off on a priority basis. This gives preference shares a higher edge as compared to equity shares.