MAJOR

INSTRUMENTS
TRADED IN STOCK
MARKET
 Finance is defined as the provision of money
at time when it is required. Without adequate
finances, no enterprise can possibly
accomplish its objectives . So the companies
issue different types of financial instrument to
get adequate finance.
 1. Issue of equity share
 2.Issue of preference share
 3.Issue of debenture
EQUITY SHARES

 Equity shares, also known as ordinary shares

or common shares, represent the owners,
capital in a company .
Characteristics of Equity Share
 Permanent capital

 Residual claim to asset & income

 Right to control or voting rights

Limited liability .
Advantages to investor

 In case of profit equity shareholders are the

real gainers.
 Real owners of the company who have the
voting rights and controlling power .
 Capital appreciation .
Disadvantage to investor

 No guarantee, regularity of receipt of

dividend.
 No guarantee of receipt of principal amount.
 Investors who desire to invest in safe
securities with a fixed income have no
attraction for such shares .
Advantages to company :

 It is permanent, long term source of finance

 There is no repayment of liability.
 It does not create any obligation to pay
dividend .
 This capital can be issued without creating
any charge over assets of the company.
Disadvantage to company

 Issue of additional shares dilutes control.

 No tax advantage (dividends are not tax
deductible).
 It make capital structure rigid .
PREFERENCE SHARES :

Preference share capital gives certain

privileges to its holders on the equity
shareholders.
 A preferential privilege in payment of a
fixed dividend .
 Preferential right as to repayment of capital
in case of liquidation.
Types of Preference
shares :
 Cumulative preference shares
 Non-cumulative preference share
 Redeemable Preference share
 Irredeemable Preference Share
 Participating Preference share
 Non-participating preference share
 Convertible preference share
 Non-convertible preference shares
Features of preference
shares
 These are generally irredeemable so
permanent.
 Prior claim on income and asset over equity
share.
 No control or voting rights.
 Hybrid form of security .
Advantages to investor
 Stable rate of preference divided.
 Prior claim on assets .
 Less risk when compared to equity share
holders.
Disadvantages to
investor :
 Limited return.
 The rate of preference dividend is generally
less than the rate of dividend on equity
shares.
 No voting rights .
Advantages to company :

 There is no legal obligation to pay

preference dividend .
 No dilution of controlling power .
 Long term capital to the company .
Disadvantages to company

 Preference dividend is not tax deductible .

 Permanent burden in case of cumulative
preference share .
 Expensive sources of finance as compared
to debt .
DEBENTURES :
A debenture is an acknowledgement of debt .
Types of debenture :
 Simple or unsecured debentures
 Secured or mortgaged debentures
 Bearer debentures
 Registered debentures
 Redeemable debentures
 Irredeemable debentures
 Convertible debentures
 Non-Convertible debentures
 Guaranteed debentures
Features of debentures
 Maturity after a specific period
 Fixed rate of interest
 Priority of claims on asset and income
 No controlling power
Advantages to investor

 Fixed amount of income

 Comparatively safer investment
 Definite maturity period
Disadvantage to investor

 No voting rights
 Only creditors and not the owner of the
company
 No controlling power
Advantages to company

 Long-term funds to a company

 Rate of interest is usually, lower
 No dilution of control
 Fixed rate of interest irrespective of the
increase in profit .
Disadvantages to company
:
 Fixed interest charge
 Charge on the assets of the company
 A company whose expected future earnings
are not stable cannot use this source