Securities with maturity period more than a year are known as long-term financial instruments.
There are three main long-term financial instruments; they are:
Common stocks (equity shares or ordinary shares)
Debt capital (bonds, debentures or long-term loan)
Preference stocks (preference shares)
Common stock or equity share is an ownership document.
It is issued by a limited company (joint Stock Company) to raise equity capital.
Every limited company is established with the help of equity shares.
In other words no equity shares, no limited company.
Total or authorized capital of the company is divided into small fractions.
These fractions are called shares.
The person who purchases shares of the company is known shareholder.
Shares are transferable to other persons and companies.
Common stock is also called ordinary share, common share or equity share.
The dividend rates on these shares are not pre-determined.
Equity shareholders can get dividend only after interest on debentures and dividend on preference shares is paid.
At the time of liquidation (winding up), equity shareholders get capital only after paying all the debts and preference share capital.
(A) Importance of equity shares to the company
No need to pay dividend when company incur loss.
No need to refund money to equity shareholders, equity share capital can be used by the company till the firm remains in existence.
The directors are elected by equity shareholders for effective management.
(B) Importance of equity shares to the shareholders
Every shareholder has a right of voting to elect the directors of the company.
If company earns more/high profit, equity shareholders can enjoy it.
Equity shareholders can easily sell or transfer the ownership to other investors/organizations.
Equity share capital remains permanently with the company.
It is returned only when the company is wound up.
Therefore, equity shareholders are the permanent investors.
Equity shareholders are the actual owners of the company.
They invest initial capital.
They bear the highest risk.
Equity shares are transferable.
Ownership of equity shares can be transferred with or without consideration to other shareholders.
Equity shareholders do not get fixed rate of dividend.
Dividend payable to equity shareholders is an appropriation of profit.
If company does not earn profit any year, equity shareholders may not get dividend.
Equity shareholders have voting right according to their shares.
Equity shareholders have the legal power to elect board of directors (BOD).
They can replace them if the board fails to protect interest of the shareholders.
Equity shareholders have the right to control the affairs of the company.
Equity shareholders have limited liabilities upto their investment.
If company bears heavy loss, equity shareholders do not need to invest more than their shares investment.
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Basic Journal Entries in Nepali
Basic Journal Entries
Journal Entry and Ledger
Trial Balance & Adjusted Trial Balance
Bank Reconciliation Statement (BRS)
Final Account: Class 11
Adjustment In Final Account
Capital and Revenue
Single Entry System
Non-Profit Organization (Non-Trading Concern)
Goswara Voucher (Journal Voucher)
The advantages of common stock to issuer and investor are as follows:
(A) From the view point of company (issuer)
The firm has minimum restrictions from common stock financing.
The firm has no legal obligation to pay dividend.
The company has to pay a dividend to the common stock if it makes earnings.
There is no fixed maturity period for common stock.
Hence, it reduces the obligation of repayment in future.
Common stocks can be sold easily from the primary market.
It is attractive to certain investor due to more expected return than in preferred stock and bond.
Common stock helps to increase the future borrowing capacity of the firm.
If the equity capital is more, the financial manager receives flexibility.
It becomes easier to borrow fund in future.
(B) From the view point of investors
The common stockholders are residual claimers.
Hence, they receive all portion of profit left after making all other payments.
Bonus share is also received in common stock.
Common stockholders can participate in management using their voting rights.
Thus, they can control the company.
They elect board of directors for their benefit.
It is said that higher the risk higher the gain.
Investors who take risk by investing in equity shares are able to take huge benefit from it.
Common stockholders are the real owners of the company.
They have voting rights.
Therefore, they have the right of ownership.
While buying the common stock, the investor receives share certificate at which the number of shares and the price of share are mentioned.
The main disadvantages of common stock are as follows:
(A) From the view point of company (issuer)
Common stock is an expensive source of long-term finance.
The shareholders expectation of return is generally high.
It needs large flotation costs as underwriting commission, brokerage fee and other expenses.
The company has to pay large amount of dividend from profit.
Thus, the company may not be able to maintain different type of funds (reserves) for future investment.
Common stock dividend is not tax deductible.
In other words, while calculating the taxable income of the firm, the dividend cannot be deducted as expenditure.
Equity shareholders have voting rights.
Due to large number of equity shareholders and right on management, they can form group.
Grouping may create obstacle in management and decision making.
The amount of capital collected from equity capital cannot be refunded easily like debt or preferred stock.
Due to high capital than required, the company may have to face the problem of over capitalization.
We know the fact that idle money earns nothing.
(B) By the view of investor
There is no fixed dividend rate in common stocks.
The income of investors is irregular and uncertain.
There is no legal obligation to provide dividend.
Sometimes, the board of director may decide not to give dividend.
Common stockholders have last priority in the liquidation.
In other words, the common stock holders receive what is left after distributing to the preferred stock holders and bond holders.
The income of the company decreases during periods of recession.
Due to this, the rate of dividend of common stock decreases and market price of common stock also decreases.
Thus, the investors will lose their capital.
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Share (Accounting for Share)
Share in Nepali
Final Account: Class 12
Final Account in Nepali
Ratio Analysis (Accounting Ratio)
Fund Flow Statement
Cash Flow Statement
Theory Accounting Xii
Theory: Cost Accounting
Cost Sheet, Unit Costing
Cost Reconciliation Statement
Rights and privilege of shareholder vary from state to state and country to country.
But some common rights are given below:
Common stockholders (equity shareholders) have the right on profit of the organization.
Similarly, they have right on remaining fund after paying all liabilities.
Thus equity shareholders have right on income and assets.
Every equity shareholder has voting right to elect managing directors.
Each shareholder has one voting right. In the absence of shareholder, proxy vote can be used.
After managing director is elected, he does work in favour of shareholders.
Equity shareholder receives dividend on his shares.
Dividend is paid from profit.
If there is loss in any accounting year, shareholders cannot receive dividend.
There is no guarantee of dividend.
Shareholders can transfer their right of shares to other persons/organizations.
The right to transfer of ownership is ordinary.
It can be done with the help of share brokers (secondary market).
Share broker charges fees for this work.
Shareholders have authority to inspect books of accounting.
Although all the limited companies publish their financial statements at the end of accounting period yet shareholders can inspect documents at any working time of the company.
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