Issue of Shares and Debentures

Abstract

A limited company may raise finance either by issuing shares or by raising loans. Debentures are simply a type of loan. Shares may be further subdivided into different types, as follows.

• (i) Preference shares are shares which carry the right to a fixed dividend before any dividend can be paid to the ordinary shareholders. Where there are insufficient profits (including those retained from previous years) to cover the preference dividend, then none can be paid and it is lost.

• (ii) Cumulative preference shares are similar to preference shares, but if in any one year, because of the circumstances described above, the dividend is not paid it accumulates and is carried forward until such time as there are sufficient profits to cover both current dividends on the shares and the arrears.

• (iii) Ordinary shares carry no right to a fixed dividend and dividends are decided upon once the profit is known. There is a risk of no dividend, but at the other end of the scale there is no limit on the amount.