Advantages of Equity Shares:

1. No Fixed Dividend: Equity shares do not hold any responsibility to

pay a fixed rate of dividend. If the profit is earned by the
company, equity shareholders are entitled to profit or else they
are entitled to get the dividend, but they cannot hold any
dividend from the company.
2. Charge over the Assets: Equity shares can be issued without even
generating any charge over the assets of the company.
3. Repay: Equity Shares are the persistent source of capital. The
company has to pay equity shares back while excluding the
liquidation period.
4. Right to vote: Equity shareholders are the actual owners of the
company who are eligible for all voting rights. This kind of
authority is only accessible to the equity shareholders.
5. Actual Gainer: Whenever the profits are earned, the equity
shareholder becomes actual gainers of profit in the form of
increased dividends and realization in the value of shares.
6. Persistent sources of finance: Equity share capital belongs to the
source of finance which is long-term permanent in nature,
therefore, it can be utilized for the long-term or requirement of
fixed capital of the business concern.
7. Less Capital Cost: Cost of capital is one of the vital factors; make a
difference in the value of the company. In the case where the
company is willing to increase its value, they have to utilize more
share capital as it has less cost of capital (ke) as compared to the
other source of finance.
8. Retained earnings: In the situation in which a company has the
extra share capital, the retained earnings will get benefit which is
the fewer cost sources of finance, as compared to other sources
of finance.
Disadvantages of equity shares:

Disadvantages to company: Equity shares have the following

disadvantages to the company:
I. Dilution in control: Each sale of equity shares dilutes the voting
power of the existing equity shareholders and extends the voting or
controlling power to the new shareholders. Equity shares are
transferable and may bring about centralization of power in few hands.
Certain groups of equity shareholders may manipulate control and
management of company by controlling the majority holdings which
may be detrimental to the interest of the company.
II. Trading on equity not possible: If equity shares alone are issued, the
company cannot trade on equity.
III. Over-capitalization: Excessive issue of equity shares may result in
over-capitalization. Dividend per share is low in that condition which
adversely affects the psychology of the investors. It is difficult to cure.
IV. No flexibility in capital structure: Equity shares cannot be paid back
during the lifetime of the company. This characteristic creates
inflexibility in capital structure of the company.
V. High cost: It costs more to finance with equity shares than with other
securities as the selling costs and underwriting commission are paid at a
higher rate on the issue of these shares.
VI. Speculation: Equity shares of good companies are subject to hectic
speculation in the stock market. Their prices fluctuate frequently which
are not in the interest of the company.
Disadvantages to investors: Equity shares have the following
disadvantages to the investors:
I. Uncertain and Irregular Income: The dividend on equity shares is
subject to availability of profits and intention of the Board of Directors
and hence the income is quite irregular and uncertain. They may get no
dividend even three are sufficient profits.
II. Capital loss During Depression Period: During recession or
depression periods, the profits of the company come down and
consequently the rate of dividend also comes down. Due to low rate of
dividend and certain other factors the market value of equity shares
goes down resulting in a capital loss to the investors.
III. Loss on Liquidation: In case, the company goes into liquidation,
equity shareholders are the worst suffers. They are paid in the last only
if any surplus is available after every other claim including the claim of
preference shareholders is settled. It is evident from the advantages
and disadvantages of equity share capital discussed above that the
issue of equity share capital is a must for a company, yet it should not
solely depend on it. In order to make its capital structure flexible, it
should raise funds from other sources also.

The Advantages and Disadvantages of

Advantages of Preference Shares from the Investor’s Point of View

There are certain advantages of preference shares from the investor’s
point of view. The advantages are as follows:

I. Fixed regular income:

The cumulative preference share investors even in case of absence of

profits for the company get a regular hold of profits. The areas of
dividends are generated in the years of profits of the company.

II. Safety of interest voting rights:

Voting rights are exerted by the investors in cases relating to the safety
of interests. The interests of the preference shareholders are thus
safeguarded.

III. Less capital losses:

The preference shareholders possess the preference rights of the

repayment of their capital as a result of which there are less capital
losses.

IV. Proper security:

Preference shareholders possess proper security in case of their shares

in cases when the company fails to generate profits.

V. Presence of preferential rights:

When it comes to payment of dividend and repayment of capital,

preference shareholders enjoy preferential rights.

There are certain disadvantages of preference shares from the

investor’s point of view. The advantages are as follows:

VI. Absence of voting rights:

Except in matters directly affecting their interests, the preference

shareholders have no rights when it comes to voting on behalf of the
company.

VII. Absence of guarantee over assets:

As in the case of debentures, the company provides no guarantee on

the assets of the preference shareholders too.
VIII. Fixed income:

There is a fixed income that is generated for the preference

shareholders. In cases where the company generates exceptional
profits, these are by no means shared with the preference
shareholders. It is thus obvious that the preferential shareholders have
no claim over the surplus of the company

Disadvantages of Preference Shares

The disadvantages of preference shares, from the point of view of the
company are as follows:

1. High rate of dividends:

The Company has to pay higher rates of dividends to the preference

shareholders as compared to the common shareholders. Thus the cost
of capital of the company is also increased.

2. Dilution of claim over assets:

Because of the very reason that preference shareholders have

preferential rights over the company assets in case of winding up of the
company, dilution of equity shareholders claim over the assets take
place.

3. Tax disadvantages:

In case of preference shareholders, the taxable income of the company

is not reduced while in case of common shareholders, the taxable
income of the company is reduced.
 4. Effect on credit worthiness:

In case of preference shares, the credit worthiness of a company is

definitely reduced because preference shareholders possess the right
over the personal assets of the company.

5. Increase in financial burden:

Because most of the preference shares issued are culminative, the

financial burden on the part of the company increases vehemently. The
company also reduces the dividends of the equity shareholders because
of the reason that it is essential on the part of the company to pay the
dividends to the preference shareholders.

1. Debenture are Preferred by Investors

Since they attract cautious investors by offering definite security and
safety of investment, issue of debentures can raise more funds.
2. Debenture are Less Investment Risk
The interest on debentures is a charge against profits. The date and
rate of payment are certain. So the investors can get interest whether
the company makes a profit or not. The company is also benefited from
the point of view of tax, as the interest is a charge against its profit.
3. Less Costly
Usually, the rate of interest is lower than the rate of dividend payable
on preference shares and equity shares. So raising of capital through
debentures is less costly.

4. Maintenance of Control
Debenture financing permits the company to raise long-term funds
without diluting the present control.

5. Ability to trade on Equity

The company can trade on equity. In this way, equity shareholders are
able to enhance their total earnings from the company.

6. Remedy against Over Capitalization

Whenever the company feels that it is over capitalized, it can redeem
the redeemable debentures. This will help the company to overcome
the defects of over capitalization.

7. Debenture is Reliable
The amount derived from debenture issue helps the company to
implement expansion programmes. This helps the company not to
depend on fair weather. Sources like public deposits.

8. Market Response
The company can easily dispose of the debentures in the open market
because debentures are having a satisfactory market response.

9. Useful for Conversion

The company may convert different loans into debentures carrying
lower rate of interest.
1. Debentures are not suitable for all Companies
It is not suitable for companies with fluctuating income and companies
producing goods, which have an elastic demand.

2. Permanent Burden
Since the company has to pay interest whether it makes a profit or
incurs loss, it becomes a permanent burden on the financial resources
of the company.

3. Requires huge Fixed Assets

Most of the debentures are secured. So companies with less fixed
assets cannot raise money through debentures.

4. No Voting Rights
The debenture holders have no voting rights. This may discourage some
investors.

5. Difficulty in Repayment
During depression, the company will find it difficult to repay the
principal and fixed interest.

6. Affecting the capacity to raise Loans

If debentures are issued, generally they are secured against all the
assets. Because of this, the company may find it difficult to raise further
loans and advances from banks, industrial financing institutions or from
outsiders.