Debentures And Loan Stock

Debentures And Loan Stock

Debentures and loan stock

Debentures and loan stock may appear in the balance sheet under the title LOAN CAPITAL. When the latter term is used, however, the word 'CAPITAL' is really a misnomer, since, unlike share capital, loan capital does form part of the company's basic permanent capital, because it generally has to be repaid at some definite date.

Some methods of raising capital are more suitable for certain industries than others. Mining and plantation companies abroad, e.g., because of the greater risks, prefer their capital to be predominantly or entirely in ordinary shares, so that the shareholders themselves carry the risk, and in the event of failure there is no loan to repay. or again, during a recession of trade in its own particular industry, a company wishing to increase its funds may have some difficulty in persuading the public to take up its unsecured preference or ordinary shares, whereas there may be a willingness to invest in secured 'fixed interest' debentures at above current rates of interest.

The concern of these webpage s is with those companies whose shares are dealt in on the Stock Exchange, and there are two types of companies which apply for Stock Exchange quotations, and raise capital from the public. These are basically:

(1)A private company issuing newly created shares, offered to the public for the first time. One reason for this might be to change the status of the company from the more restricted private to the wider public ownership, thus freeing the private owners from having a large proportion of their capital (and responsibility) locked-up in one cam-party, and at the same time securing a good price for part of their ownership, while retaining a stake in the business. Another reason might be the retirement or death of the thief shareholder in the private company. His heirs will have to meet death duties, and in order to preserve the company they may acquire finds by making issues of shares for public subscription.

(2)An unquoted public company already in existence and now seeking Stock Exchange quotation. One reason for this might be to facilitate the raising of more capital in the future, by making 'rights' issues to existing shareholders. Another reason might be that holders of large numbers of shares could easily obtain funds whenever necessary by their ability to sell shares on the market.

The people who supply the capital raised as described above are, of course, the investors, and their relationship with the company is that of shareholders or stockholders, the securities they hold being termed shares or stock.

The terms stock (or stock units) and shares are nowadays virtually interchangeable, there being no longer, for practical purposes, any substantial distinction between them.

In the interests of new investors who will want to know the fuller meaning of the different classes of share and the conditions attaching to each, there now follows a detailed explanation of preference and ordinary shares:


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