1. What is Equity ?

A share of ownership in a company, shown by a stock or other security.

·Equity shares, also commonly called stocks, are a source of long-term finance for a company.

It is a small portion of the company that an investor buys in anticipation of future profits.

Equity shares are also known as ordinary shares. They are the form of fractional or part ownership in
which the shareholder, as a fractional owner, takes the maximum business risk. The holders of
Equity shares are members of the company and have voting rights. Equity shares are the vital source
for raising long-term capital.

Equity shares represent the ownership of a company and capital raised by the issue of such shares is
known as ownership capital or owner’s funds. They are the foundation for the creation of a company.

Equity shareholders are paid on the basis of earnings of the company and do not get a fixed dividend.
They are referred to as ‘residual owners’. They receive what is left after all other claims on the
company’s income and assets have been settled. Through their right to vote, these shareholders have
a right to participate in the management of the company.

Merits of Equity Shares

• Equity capital is the foundation of the capital of a company. It stands last in the list of
claims and it provides a cushion for creditors.

• Equity capital provides creditworthiness to the company and confidence to

prospective loan providers.

• Investors who are willing to take a bigger risk for higher returns prefer equity shares.

• There is no burden on the company, as payment of dividend to the equity shareholders is

not compulsory.

• Equity issue raises funds without creating any charge on the assets of the company.

• Voting rights of equity shareholders make them have democratic control over
the management of the company

Limitations of Equity Shares

• Investors who prefer steady income may not prefer equity shares.

• The cost of equity shares is higher than the cost of raising funds through other sources.

• The issue of additional equity shares dilutes the voting power and earnings of existing
equity shareholders.

• Many formalities and procedural delays are involved and they are time-consuming
processes
 2. What is Preference share ?

Preference shares are the shares which promise the holder a fixed dividend, whose payment takes
priority over that of ordinary share dividends. Capital raised by the issue of preference shares is called
preference share capital.

The preference shareholders are in superior position over equity shareholders in two ways:
first, receiving a fixed rate of dividend, out of the profits of the company, before any dividend is
declared for equity shareholder and second, receiving their capital after the claims of the company’s
creditors have been settled, at the time of liquidation. In short, the preference shareholders have a
preferential claim over dividend and repayment of capital as compared to equity shareholders.

Preference shareholders generally do not enjoy any voting rights. In certain cases, holders of
preference shares may claim voting rights if the dividends are not paid for two years or more.

• preferential right of repayment over equity shareholders in the event of liquidation or

bankruptcy of a company.

• Preference capital does not create any sort of charge against the assets of a company.

Limitations of Preference Shares:

• The rate of dividend on preference shares is generally higher than the rate of interest on
debentures.

• The Dividend on these shares is to be paid only when the company earns a profit, there is
no assured return for the investors.

• Preference shares are not preferred by those investors who are willing to take a risk and
are interested in higher returns;

• Preference capital dilutes the claims of equity shareholders over assets of the company.

• The dividend paid is not deductible from profits as an expense. Thus, there is no tax
saving as in the case of interest on loans.

3. What is Debentures?

a Debenture is the acknowledgment of the debt the organization has taken from the public at large.
They are very crucial for raising long-term debt capital. A company can raise funds through the issue
of debentures, which has a fixed rate of interest on it. The debenture issued by a company is an
acknowledgment that the company has borrowed an amount of money from the public, which it
promises to repay at a future date. Debenture holders are, therefore, creditors of the company.

Types of debentures:
1. Secured and Unsecured:
Secured debenture creates a charge on the assets of the company, thereby mortgaging the assets of
the company. Unsecured debenture does not carry any charge or security on the assets of the
company.

2. Registered and Bearer:

A registered debenture is recorded in the register of debenture holders of the company. A regular
instrument of transfer is required for their transfer. In contrast, the debenture which is transferable by
mere delivery is called bearer debenture.

3. Convertible and Non-Convertible:

Convertible debenture can be converted into equity shares after the expiry of a specified period. On
the other hand, a non-convertible debenture is those which cannot be converted into equity shares.

4. First and Second:

A debenture which is repaid before the other debenture is known as the first debenture. The second
debenture is that which is paid after the first debenture has been paid back.

4. What is bond?

A bond is a fixed-income investment that represents a loan made by an investor to a borrower,

ususally corporate or governmental. A bond is generally a form of debt which the investors pay to
the issuers for a defined time frame. · Bonds generally have a fixed maturity date.

Organizations in order to raise capital issue bond to investors which is nothing but a financial
contract, where the organization promises to pay the principal amount and interest (in the form
of coupons) to the holder of the bond after a certain date. (Also called maturity date). Some
Bonds do not pay interest to the investors, however it is mandatory for the issuers to pay the
principal amount to the investors.

Characteristics of a Bond
• A bond is generally a form of debt which the investors pay to the issuers for a defined
time frame. In a layman’s language, bond holders offer credit to the company issuing
the bond.
• Bonds generally have a fixed maturity date.
• All bonds repay the principal amount after the maturity date; however some bonds do
pay the interest along with the principal to the bond holders.
Types of Bonds

Following are the types of bonds:

1. Fixed Rate Bonds

In Fixed Rate Bonds, the interest remains fixed through out the tenure of the bond.
Owing to a constant interest rate, fixed rate bonds are resistant to changes and
fluctuations in the market.
2. Floating Rate Bonds

Floating rate bonds have a fluctuating interest rate (coupons) as per the current market
reference rate.
3. Zero Interest Rate Bonds

Zero Interest Rate Bonds do not pay any regular interest to the investors. In such types
of bonds, issuers only pay the principal amount to the bond holders.
4. Inflation Linked Bonds

Bonds linked to inflation are called inflation linked bonds. The interest rate of Inflation
linked bonds is generally lower than fixed rate bonds.
5. Perpetual Bonds

Bonds with no maturity dates are called perpetual bonds. Holders of perpetual bonds
enjoy interest throughout.
6. Subordinated Bonds

Bonds which are given less priority as compared to other bonds of the company in cases
of a close down are called subordinated bonds. In cases of liquidation, subordinated
bonds are given less importance as compared to senior bonds which are paid first.
7. Bearer Bonds

Bearer Bonds do not carry the name of the bond holder and anyone who possesses the
bond certificate can claim the amount. If the bond certificate gets stolen or misplaced
by the bond holder, anyone else with the paper can claim the bond amount.
8. War Bonds

War Bonds are issued by any government to raise funds in cases of war.
9. Serial Bonds

Bonds maturing over a period of time in installments are called serial bonds.
10. Climate Bonds

Climate Bonds are issued by any government to raise funds when the country concerned
faces any adverse changes in climatic conditions.