These shares are exceptionally risky. The advantages of ordinary shares are: 1) If there are good profits, dividends are paid at a higher rate. 2) Share value goes up in the stock market, increases profits. 3) Shares can be straightforwardly sold in the stock market. 4) Shareholders have a say in company management. 5) Capital raised by issuing of shares is not required to be paid back during company lifetime. 6) Regarding payment of dividends on shares the company is not liable. The demerits of ordinary shares are: 1) Uncertainty in dividend payment, shareholders get bonuses only when the company is making profits. 2) There is share prices speculation especially when bonus paid by the company is high. 3) Over-capitalization danger from miscalculation of long-term financial requirements. 4) There is a high degree of risks for the equity shareholders for instance, if the company is winding up, they are the last to be refunded. The other shares are preference shares. Preference shareholders enjoy several rights over ordinary shareholders; they receive a bonus at a fixed rate and regularly, capital is given back in case of wounding up of the company this means they are paid before ordinary shareholders. Preference shares are safe comparing with ordinary ones. From the above information, we can now easily differentiate between equity and preference shares. In preference shares, issuing of shares is not compulsory compared to equity shares where issuing of the shares is compulsory. In preference shares, paying of bonus are done before equity shareholders while, in equity shares, the shareholders are paid only preference shareholders. In case of closing up of a company, preference shareholders are refunded their capital before the equity shareholders, while the equity...
The disadvantages are:
1) Uncertainty: in order for a company to attract public to deposit their savings, it should have a credit rating that is high. Certain financial problems may arise from sudden deposits withdrawals.
2) Lack of security: there are no charges on the concerned assets by the public. Therefore, there is a risk in depositing savings with a company that is not very sound.
3) Obstruction of capital-market growth: lack of capital-market growth deprives the investor and the company good security benefits. This comes from more and more incoming deposits with the company hence less security investment.
4) Over–capitalization: this source of finance may lead to raising of more currency than is needed. This will lead a company to get involved in speculative activities or may be unable to put the funds to best use.
The fifth long-term source is, borrowing from banks. This involves acquiring of loans from banks and financial institutions. Lending between a bank and organization is dependent on trust and understanding amongst the two. Banks give loans for more than a year. Banks give funds to small-scale units.
Long-term borrowing from banks has some merits:
1) Flexible in nature this is seen when loans are repaid when the need is met.
2) Availability of finance for a definite period thus no burden.
3) Secrecy by banks on its clients’ financial operations.
4) Saves time and cost compared to shares and debentures.
5) No interference of internal affairs by the bank hence company control is retained by management.
Demerits of borrowing from banks are as follows:
1) When borrowing, personal guarantee or assets pledge is required, and an organization cannot raise more loans on these assets.