Limited companies issues shares to investors as means of raising capital. In return, the investor receives a portion of the company which is equivalent to the amount of shares purchased. The business uses it's flotation of share to make the shares available to the general public for sale.
There are two types of shares:
- Ordinary Shares
- Preference Shares
Ordinary shares are sold to the investor who in return receives a portion of the profits that the company makes. This is given in the form of a dividend which changes annually to reflect the performance of the business.
Preference shares are given to preferencial investors at a fixed dividend rate, regardless of the performance of the business. These preferential shareholders are always paid before the ordinary shareholders.
Issuing ordinary shares tends to reduce the power of ownership of the original owners of the business as it reduces their relative shareholding. Unless the business owners retain 51% of the business, they could risk loosing control of the whole business to it's shareholders.
Businesses can acquire finance through internal and external sources. Internal sources include retained profits and the owners' funds. External sources can include mortgages, hire purchases etc.
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