Many of you may have a dream of becoming an entrepreneur and start running your own business. Before deciding on the accounting firm in Johor Bahru that you want to hire to help you with your accounting-related tasks, you need to raise funds for your business first. However, do you know how to raise capital for your start-up? In general, there are two main categories of capital sources, which are debt financing as well as equity financing. The former is means that you borrowed money from others, and you need to pay it back with interest. Contrarily, the latter means that you need to give part of the ownership or your business, and the investors will invest money in your company in return.
The issuance of common shares falls under the second category, and it aims to raise funds for the business (Also see How to Start a Business in Malaysia?) operations of the company. The equity ownership that each investor has is directly proportional to the number of common shares they are holding. They will appear in the company’s balance sheet under shareholder’s equity.
Common shares do not have a fixed dividend. This means that the company can decide whether it wants to pay the dividend depending on the company’s financials. Besides, common shares carry voting rights. This indicates that each of them represents a vote and the company can use it in the company’s AGM (Annual General Meeting) and other meetings when it wants to appoint directors, pass the resolutions, and so on.
The number of common shares (Also see What is Share Certificate?) of a company will change if the company takes corporate actions. Corporate actions refer to the event that the company has carried out which bring an impact to the stakeholders. Some examples of such actions include the issuance of bonus shares, repurchase of stocks, share split and so on.
Bonus shares refer to the shares that the company grants to its existing shareholders according to the shares that they are holding at no cost. This can be considered as stock dividends. Besides, the company may choose to repurchase its stock back from its shareholders in the open market at the current market price if it has sufficient cash. Doing so causes the number of common shares to reduce and increases the value of the remaining outstanding shares.
Also, share splits will affect the number of common shares of a company too. This means that a company divide its shares into multiple shares in some proportion. For example, if the company chooses to break the share in the proportion of 1:3, all the shareholders that have one share will have three with them now. Share splits will increase the number of shares of the company, yet it will also cause a decrease in the price per share at the same time.
Holding the common shares of a company can bring some advantages to the shareholders who hold them. As an instance, the shareholders will benefit from the company’s capital gains as well as dividends (Also see How to Differentiate Dividend and Interest?). The issuance of common shares can also help the companies to raise capital so that the business can continue expanding without having to increase too many debts (Also see Can You Differentiate Debt and Liability?).
However, there are some disadvantages of holding common shares too. As common shares do not have a fixed dividend, the shareholders may need to wait for a few years before they can receive gains from the common shares that they hold. If there are any internal frauds or the company has taken risks that it should not have taken, it may go bankrupt and the shareholders can lose all the capital they have invested.