Ordinary share capital – money given to a company by share folders in return for a share certificate that gives them part of the company and entitles them to a share of the profits
· Known as risk capital or equity capital. If the business is successful , each shareholder receives a dividend.
· Ordinary share capital appeals to investors who are prepared to take a risk in return for higher rewards. If a business foes into liquidation and ceases to exists because it cannot pay its debts, money invested by shareholders will only be returned to them if every debt has been paid in full. On the other hand, because profitable companies can borrow at low interest rates, shareholders can get high returns when things go well.
· In the case of liquidation, the shareholder is protected by the limited liability provided by limited companies. This means that shareholders can only lose the paid up value of their shares and cannot be asked to pay any more money
· Ordinary shares are often known as permanent capital, as the business will always have shareholders who own these shares. For this reason, ordinary share capital is used a as long term source of finance, to set up the firm in the first place or for major expansion plan that cannot be financed from other sources.
· For expansion plans, companies will often use a rights issue, where the new shares are sold to existing shareholders. This reduces the administrative shares are sold to existing shareholders. This reduces the administrative costs that are an element of issuing ordinary share capital, as the new shares are often sold in proportion to the existing number of shares.
· Limited liability encourages shareholders to invest in the business, as it restricts the amount of money they can lose
· it is not necessary to pay shareholders a dividend if the business cannot afford these payments. This contrasts sharply with loans- interest must be paid on these , regardless of the success or failure of the business
· bringing new shareholders into a small business can add further expertise. This usually applies when the additional share capital is being provided by a business angel or venture capitalist
· increasing ordinary share capital can make it easier to borrow more funds from a bank…