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Equity share capital or equity financing is one of the primary methods of fundraising capital for
a joint stock company. A company issues equity shares for raising capital investment in exchange
for the share in the ownership of the company. Shareholders gain voting rights and control over the
management. These shares are issued to general public and shareholders are entitled to the residual
income of the company once it dissolves.
Shareholders may enjoy high dividends on their investments in case of profits. Another
benefit is that these shares are easily transferrable and hence very liquid. Equity financing is a
high-risk investment from shareholder’s point of view as equity shareholders do not enjoy
any preferential rights with regard to repayment of capital or dividends. Their payment is
uncertain and least in order of priority.
From company’s point of view, equity capital enhances goodwill and helps attract potential
creditors with ease. There is no obligation on the company to pay dividends and there is no
maturity date for shares. On the other hands, huge equity capital leads to dilution of
ownership and also is a big cost for the company as shareholders expect big dividends, which
are to be paid after tax deductions.
Preference share capital or preferred stock is another method of fundraising for a joint stock
company. Preferred shares are shares of company’s stock that guarantee certain preference to the
shareholders in terms of dividends and capital repayment. These shares have fixed rate of
dividends in case the company reaps profit and their payment is legally binding. Payment of
dividends to equity shareholders is done only if surplus profit is left over after payment of
dividends to preference shareholders. In case of bankruptcy or winding up of the company,
preference shareholders have first right to claim over the return of capital or sale of assets
respectively. But preferred shareholders do not have any ownership or voting rights in the
company. Preference shares are relatively less volatile than equity shares. Nevertheless,
preference shares are optimal for risk-averse investors looking for a steady flow of fixed
dividends. Also, these shares can be called for repayment even before the company dissolves,
unlike the equity shares.
Debentures are instruments of medium to long term debts which are used by companies to
borrow money, at fixed rates of interest. They are a kin loan certificates for a fixed period of
time. Debentures are freely transferrable and debenture holders do not enjoy any voting rights in
the company. Debentures can be issues with our without collateral, coining on the goodwill and
faith in the latter case. In case the company defaults, debenture holders have first claim over any
unpledged assets for seizing. Interest on debentures is payable even if the company is operating
under loss.

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