- Ordinary share capital is the amount of money raised by a company through the sale of its ordinary shares to investors in exchange for ownership in the company.
- It is one of the main sources of finance available to companies and can be used to fund various activities such as research and development, expansion plans, and debt repayment.
Features of Ordinary Share Capital as a Source of Finance:
- Equity finance: ordinary shares represent ownership in the company and investors are entitled to a portion of the company’s profits through dividends.
- No fixed repayment schedule: unlike debt financing, there is no fixed schedule for the repayment of ordinary share capital.
- A permanent source of finance: once shares are issued, the capital raised remains in the company indefinitely, unless the shares are bought back or cancelled.
- Voting rights: ordinary shareholders have the right to vote on certain company matters such as the election of the board of directors and major corporate decisions.
Ideal uses of Ordinary Share Capital:
- Funding long-term projects such as research and development, new product development, and market expansion.
- Raising capital for mergers and acquisitions.
- Providing a source of finance for early-stage companies that may not be able to access debt financing.
Benefits of Ordinary Share Capital:
- No obligation to pay dividends: Unlike debt financing, there is no obligation for the company to pay dividends to shareholders.
- Enhance the company’s image: Issuing shares on a public stock exchange can enhance the company’s public image and increase its visibility.
- No interest payments: The company does not have to make interest payments to shareholders, unlike debt financing.
- No fixed repayment schedule: Ordinary share capital does not have a fixed repayment schedule, providing more flexibility for the company in managing its finances.
- Can attract long-term investors: The issuance of ordinary shares can attract long-term investors who are interested in investing in the company’s future growth potential.
- No collateral required: Unlike debt financing, the company does not have to provide any collateral to issue shares.
- Increases liquidity: Trading of shares on public exchanges increases liquidity for investors, making it easier to buy and sell shares.
- Can be used as currency for acquisitions: Shares can be used as currency for mergers and acquisitions, allowing the company to acquire other companies without using cash.
Drawbacks of Ordinary Share Capital:
- Dilution of ownership: Issuing more shares can dilute the ownership of existing shareholders.
- Loss of control: Issuing shares to outside investors can result in a loss of control for the company’s management.
- Costly to issue: The cost of issuing shares, including legal and accounting fees, can be expensive.
- Dividend payments: The payment of dividends to shareholders can be costly and can limit the company’s ability to reinvest profits in the business.
- Public scrutiny: Issuing shares on a public stock exchange subjects the company to public scrutiny and reporting requirements.
- Uncertainty of future funding: Issuing shares does not guarantee future funding for the company, as investors can choose not to invest in future offerings.
- Negative impact on share price: The issuance of additional shares can have a negative impact on the company’s share price.
- Shareholder expectations: Shareholders may have expectations regarding the company’s future growth and profitability, which can put pressure on management to meet those expectations.