Plekhanov Russian Economic Academy

Advantages

. access to the capital market and to larger amounts of finance becomes possible by having shares quoted on the Stock Exchange;

. institutions are more likely to invest on the public listed company, and additional borrowing becomes possible;

. shareholders will find it easier to sell their shares in the wider market;

. the company attains a higher financial standing;

. provides an opportunity for public companies to introduce tax-efficient employee share option scheme.

Disadvantages

. cost of a public flotation of shares are high – as much as 4% - 10% of the value of the issue;

. because outside shareholders are admitted, some control may be lost over the business;

. publicly quoted companies are subject to more scrutiny than private;

. the risk of being taken over by purchasing of company’s shares on the

Stock Exchange;

. as the market tends to be influenced more by the short- then long-term strategy of listed companies, a company committed to a long-term plan may find its stock market performance disappointing.

The going public company is required:

. minimum issued capital of ?50.000;

. minimum market capitalization of ?500.000;

. 25% of your equity shares available to the public;

. sign a Stock Exchange listing agreement, which binds you to disclose specified information about your company in future.

2. Types of Shares

There are two main classes of shares are ordinary and preference

Ordinary shares (sometimes called ‘equity’ shares)Those are the highest risk-takers shares in the company. This implies that the holder’s claims upon profit – for dividend, and assets – if the company is liquidated, are deferred to the prior rights of creditors and other security holders. However, the capital liability of ordinary shareholders is limited to the amount they have agreed to subscribe on their shares, therefore they cannot be called upon to meet any further deficiency that the company may incur. If the ordinary shares are the voting (controlling shares) but in some companies the significant proportion is held by the directors and the remainder are widely held by a large number of shareholders, so the directors may effectively control the company.

Preference shares

They also are the part of the equity ownership, attractive to risk-averse investors because of their fixed rate of dividend, which normally must be at a higher level than the rate of interest paid to lenders, because of the relatively greater risk of non-payment of dividend. Whilst they are part of the share capital, the holders are not normally entitled to a vote, unless the terms of issue specified overwise, and even then votes are usually only exercisable when dividends are in arrears. Preference shareholders have prior rights to dividend before ordinary shareholders, but it may be withheld if the directors consider there are insufficient resources to meet it. There is an implied right to accumulation of dividends if they are unpaid, unless the shares are stated to be non-cumulative. Payment of such arrears has priority over future ordinary dividends. And if the company goes into liquidation, preference shareholders are not entitled to payment of dividend arrears or of capital before ordinary shareholders, unless their terms of issue provide otherwise, which they usually do.