A balance sheet shows a business's assets, liabilities, and net worth. It breaks down assets into fixed assets (long-term assets like machinery and buildings) and current assets (short-term assets that can be converted to cash within a year like inventory). Fixed assets are depreciated over their useful life. Liabilities include current liabilities (due within a year) and long-term liabilities. The balance sheet provides a snapshot of a company's financial position on a given date.

1. Balance Sheet
A balance sheet is a statement of a business’s assets, liability and net worth. It is normally laid out
according to the Companies Act formats although some bookkeeping and accounting systems produce
documents in alterative layouts.
The purpose of a balance sheet is to show the type of assets a business has and then to describe how these
have been financed.
Fixed Assets
Assets shown on a balance sheet can be sub-divided in to intangible and tangible groupings. The former
category contains items such as goodwill, trademarks and research and development expenditure.
The valuation of these items is subjective as their true worth can only be known following a successful sale
of either the asset separately or the business as a whole.
Prudence and caution in assigning amounts to intangible assets might result in the balance sheet displaying
them with conservative valuations, far removed from what they are actually worth.
Tangible assets typically attract far more objective valuations as they exist usually as a result of a
measurable transfer or exchange on which a monetary value can be assigned.
Items within the category include furniture, machinery, computers and other assets which are typically
used in a business for a number of years.
Depreciation and Amortisation
Both intangible and tangible assets are usually subject to depreciation or amortisation which represents the
usage of those items during the year.
Different classes of assets may have varying periods over which they can be used, for example, a building
will be capable of serving the business for a longer time than a desktop computer would.
The depreciation of the computer would therefore be faster than the amortisation of the building. The
reduction in the asset’s value shown of the balance sheet would therefore reflect the expected useful life
over and benefit which would typically accrue to the business.
Current Assets
The term current assets is used to describe items which are held in cash or which have a high liquidity rate,
for example, shares and trade debtors.
This class of assets are shown below fixed items on the balance sheets and represent the working capital of
the business. Cash and other current assets are used to pay suppliers and other short term creditors so that

2. the operations remain solvent.
Where current assets are not available for this purpose, the business will be forced to liquidate some from
the fixed category which may in turn significantly curtain its ability to conduct its operations in the longer
term.
Liabilities
For the purposes of this article liabilities will be used to describe all items involved in financing the
business including shareholders funds.
In order for the business to have commenced its operations it would have had to have received an injection
of funds from some source. This might have been from the entrepreneur’s own savings or alternatively
from an external body such as a bank or suppliers in the form of credit.
At any one time, it is likely that the business owes money to creditors for purchases it has made and
perhaps to other financiers of its operations. These amounts are depicted either current or long term
liabilities.
Generally, those amounts form any source which are repayable within one year will be shown as current
and those which are due after this period will be described as long term.
Some money might be owed to the shareholders, partners or sole trader who provided the business with its
initial financing and expansion capital.
The distinction between owner liabilities and those which are owed to third parties in reality show the
amounts which the business has some discretion over. It is unlikely that the owners would demand
repayment of the sums of owed to them to the detriment of the operations.
Other third party creditors however would more likely be driven by self interest and would not have the
long term future of the business at the forefront of the decision of whether to claim payments for amounts
owed to them.
Fixed Assets are the assets of permanent nature that a business acquires. Examples include machinery and
equipment, building, furniture, vehicles etc. These assets are not sold or purchased occasionally and
therefore considered fixed. You usually get them when starting your business and retain them for the life-
time of your business or company (but it depends on the asset life, too). However, these assets have more
life than the long-term assets that usually last for a year or more.
Current Assets are the receivables that are expected to be received within a year as per balance sheet. These
include any assets that are to be converted into cash within a financial year. Examples include cash,
accounts receivables, short-term investments, and other cash-equivalents.
Current Liabilities are the liabilities (or the business obligations/debts) that are payable within a year as per

3. balance sheet. These are the payments that are to be paid by a company within a financial year. Examples
include accounts payable, and short-term debts.
Tax Liability is the amount of tax payable on your annual income, sale of an asset etc. and is different from
other types of liabilities. Fixed assets have no direct influence on tax liability but if planned properly can
reduce the overall tax liability of a firm. If this liability is payable in a year, then tax liability is a current
liability.
Hope it helps!
source(s):
My financial accounting knowledge
http://www.allaboutfinances.com/fixed-asset-accounting/
Assets
Gross blockis the sum total of all assets of the company valued at their cost of acquisition. This is
inclusive of the depreciation that is to be charged on each asset. Net block is the gross block less
accumulated depreciation on assets. Net block is actually what the asset are worth to the company.
Capital work in progress,
sometimes at the end of the financial year, there is some construction or
installation going on in the company, which is not complete, such installation is recorded in the books
as capital work in progress because it is asset for the business.
If the company has made some investments out of its free cash, it is recorded under the head
investments. Inventory is the stock of goods that a company has at any point of time. Receivables include
the debtors of the company, i.e., it includes all those accounts which are to give money back to the
company. Other current assets include all the assets, which can be converted into cash within a very
short period of time like cash in bank etc.
is the owner's equity. It is the most permanent source of finance for the company.
Equity Share capital
include the free reserves of the company which are built out of the genuine profits of the
Reserves
company. Together they are known as net worth of the company.
includes the long term and the short debt of the company. Long term is for a longer
Total debt
duration, usually for a period more than 3 years like debentures. Short term debt is for a lesser
duration, usually for less than a year like bank finance for working capital.
Creditorsare those entities to which the company owes money. Other liabilities and provisions include all
the liabilities that do not fall under any of the above heads and various provisions made.
Role of Balance Sheet in Investment Decision making
After analyzing the income statement, move on to the balance sheet and continue your analysis.
While the income statement recaps three months' worth of operations, the balance sheet is a
snapshot of what the company's finances look like only on the last day of the quarter. (It's much like
if you took every statement you received from every financial institution you have dealings with —
banks, brokerages, credit card issuers, mortgage banks, etc. — and listed the closing balances of
each account.)

4. When reviewing the balance sheet, keep an eye on inventories and accounts receivable. If inventories
are growing too quickly, perhaps some of it is outdated or obsolete. If the accounts receivable are
growing faster than sales, then it might indicate a problem, such as lax credit policies or poor internal
controls. Finally, take a look at the liability side of the balance sheet. Look at both long-term and
short-term debt. Have they increased? If so, why? How about accounts payable?
After you've done the numerical analysis, read the comments made by management. They should
have addressed anything that looked unusual, such as a large increase in inventory. Management will
also usually make some statements about the future prospects of business. These comments are only
the opinion of management, so use them as such.
When all is said and done, you'll probably have some new thoughts and ideas on your investments.
By all means, write them down. Use your new benchmark as a basis for analyzing your portfolio next
time. Spending a few minutes like this each quarter reviewing your holdings can help you stay on
track with your investment goals.
Introduction
Joint Stock Company is the most practical form of organization for large scale business. In India the Indian
Companies Act of 1956 governs joint stock companies. Owners of a company are known as shareholders, because
they hold the shares of capital of the company.
Share and Share Capital: Meaning, Nature and Types
The most striking feature of a joint stock company is its ownership structure. The capital in a joint stock company is
divided into small shares of fixed value. This facilitates easy investment. Shareholders do not directly mange the
company. They elect directors who carry out management of a joint stock company. The shareholders have only
limited liability in the event of extreme loss or liquidation with excessive outside liability. The face value of the shares
held by a person is the maximum amount that he can lose in a joint stock company. If the shares are fully paid up he
need not pay anything further even if the company is liquidated with heavy unpaid claims. If the shares held are
partly paid up, the unpaid portion of the shares may be called up if the assets available in the company are not
enough to pay off liabilities.
Shares can be sold and purchased in the stock exchange. By purchasing shares a person gets part ownership of the
business. By becoming a share holder a person cannot immediately start managing the company. Directors are the
people who manage the business. Directors are elected representatives of shareholders who carry out the
management of a joint stock company. Thus a shareholder can vote to elect directors. He can also contest in the
election to become director. A joint stock company is regarded as an artificial person. It is considered to have an
identity apart from the shareholders. A company can enter into contract, buy or sell properties in its own name, file
lawsuits or can be sued.
Types of share capital

5. Share capital is basically classified into equity and preference share capital. Equity capital is that part of the share
capital whose fortunes are directly linked to the performance of the business. Preference shares on the other hand
are the ones having priority in the payment of dividend and repayment of capital in the event of liquidation of a
company. Divided for the preference shares are paid at a prescribed rate. Preference shareholders have fixed
income irrespective of the performance of the business. Equity dividend is declared each year, which will vary
according to the profit earned by the business. The equity shareholders are the ones who actually bear the risk in
business. When the performance of the business is good, they get a high percentage of income. The value of shares
will also increase in the market. Capital appreciation is the prime attraction of equity shares in a company having
consistently good performance.
Apart from the basic classification of equity and preference share capital may be referred by different qualifying
terms highlighting certain specific aspects of share capital. Following terms used to qualify share capital.
1. Authorized Capital or Registered Capital
This is the maximum amount of capital a company is authorised to raise from the public. This is specified in the
Memorandum of Association of the company.
2. Issued Capital
Issued capital indicates that part of the authorised capital offered to public subscription.
3. Subscribed Capital
This is the part of the issued capital actually purchased or subscribed by the public.
4. Called up Capital
Called up capital indicates the portion of the subscribed capital called up by the company for payment.
5. Paid up Capital
This the amount of called up capital actually paid up by the public. Paid up capital becomes the liability of the
company towards its shareholders.
6. Reserve Capital
Reserve capital is the part of the uncalled capital set aside as reserve, by the company to call up only in the event of
liquidation of the company.
Accounting for Share Capital
Capital of joint stock companies is referred as share capital because it is divided into shares. Share capital is usually
not collected in lump sum, but in instalments at various stages, such as application, allotment, 1st call etc. For the

6. purpose of convenient accounting, a temporary account representing each of these stages will be opened in the
ledger which will be closed once the amounts expected on that stage is fully collected or the shares are cancelled for
unpaid amounts.
Following are the journal entries for issue of share capital:
Share Application Stage
The first stage in issue of share is the application stage. At this point the company will give extensive publicity to the
share issue and invite the public to apply for the shares. A prospectus which is official invitation to the public,
containing details of the company, proposed number of shares, its type, value etc. will be issued to the pubic and
registered with the registrar of companies.
In response to the invitation by the company, public will apply for the shares. A part of the value of shares will be
specified as application money which is to be paid along with the application. This amount will be deposited in the
bank account of the company. Application money cannot be less than 25% of the issue price. Following journal
entries are passed at the collection and capitalisation of application money.
i.. When share application money is received
Bank Account Dr.
To Share Application Account
ii. Application money credited to Capital Account
Share Application Account Dr.
To Share Capital
The second entry will close the Share Application Account, and in the ledger there will be Cash at Bank on one side
and Share Capital on the other, provided the number of applications invited and the number of applications received
are the same.
Over-Subscription and Under-Subscription
Over-subscription: It is unlikely that the public apply for the exact number of shares invited by the company. When
applications received exceed the number invited, the share is said to be over-subscribed. It also means that the
company received more application money than what was originally invited. Now the company cannot conveniently
increase the number of shares and keep the money as capital. Instead, it must refund the excess amount received or

7. make a part allotment on applications from each individual, and adjust the money on the subsequent payments due
from the same applicant.
Under-subscription: Under-subscription is a situation just the opposite of over-subscription. Here the company
received less number of applications than what was invited. In case of under subscription the company will proceed
to allotment and subsequent stages with the actual number of shares applied by the public.
When there is over subscription share capital account will not be closed by the transfer to capital alone (second entry
above). This is because the company has received more money. This excess amount should either be paid off or
adjusted to subsequent payments due by passing one of the following entries depending on what is decided by the
directors.
i. If the excess amount is refunded to applicants
Share Application Account Dr.
To Bank
ii. If the excess amount is adjusted to Allotment
Share Application Account Dr.
Share Allotment
Share Allotment Stage
After the closure of share issue the directors proceed to the allotment of shares. An additional amount towards the
capital on the allotted shares is collected at this stage. This amount is called allotment money.
Following journal entries are passed at allotment stage:
i.. Allotment money credited to capital
Share Allotment Account Dr.
To Share Capital
ii. Collection of allotment money
Bank Account Dr.
To share Allotment Account

8. Share 1st Call
After the share allotment, the company will collect the remaining capital in one or two additional instalments which
are known as calls on shares. Same accounting entries are passed for all calls.
Following are the typical entries:
i. Call money credited to capital
Share 1st Call Dr.
To Share Capital
ii. Collection of call money
Bank Account Dr.
To Share 1st Call
Issue and Allotment of Preference Shares
Preference shares as also part of capital. But these shares as the name suggest are having some special privileges
or preferences. Following are the important features of preference shares.
a. Preference shares are issued with a prescribed rate of dividend. Thus such shareholders have an assured
income from their shares. When the company does not make huge profits there is an advantage to the
Preference shareholder. But when the profit is high, a preference shareholder must satisfy with his
prescribed rate of dividend.
b. In the event of liquidation of the company the preference shareholders get a priority over the equity
shareholder in the repayment of capital.
c. Preference shareholders have less say in the management of the company. Equity shareholders who are
the real risk bearing investors mainly control management.
Form the accounting point of view there is no much difference between the issue of equity shares or preference
shares. The only difference is that the preference capital account will be clearly stated as “preference share capital”
in the journal entry. But there is no need to specify “equity capital” when it is issued. The term capital is understood
as equity capital.
Private Placement and Public Subscription of Share Capital

9. Issue of shares under private placement implies the issue of shares to a selected group of persons. Private
placement is an issue that is not a public issue. In order to make private placement, a company should pass a
special resolution to that effect. If the number of votes cast in favour of private placement is not sufficient to pass a
special resolution, but more than the number of votes cast against, the directors can approach Central Government
for approval, stating that the proposed private placement is most beneficial to the company.
1. What is authorized capital? What is its significance? How does it differ from issued capital?
Authorized capital is also known as registered capital. This is the capital registered by stating it in the in the
Memorandum of Association of a Joint Stock Company. It is the maximum amount of capital that a company is
normally allowed to raise by way of share capital. If a company needs to raise more amount it must first alter the
Memorandum of Association. Authorized capital is different from issued capital. Out of the authorized capital the
portion that is issued to public is known as issued capital. Therefore issued capital can be equal or less than the
authorized capital, but can never be more than the authorized capital.
2. State the provisions of the Companies Act, 1956 for the issue of shares at discount.
Conditions regarding the issue of debentures at discount are stated in Section 79 of the Indian Companies Act,
1956. Following are the important conditions:
1. A new company cannot issue shares a discount. A company is allowed to issue shares at a discount only one
year after commencement of business.
2. An ordinary resolution authorizing the issue of shares at a discount must be passed in the general meeting of
shareholders.
3. A new class of share cannot be issued at a discount.
4. Rate of discount cannot exceed 10% of the face value, unless special permission from the Company Law
Board is obtained.
5. The shares must be issued within two months of obtaining permission from the Company Law Board
3. Distinguish between over-subscription and under-subscription. How is over subscription dealt with?
When a company issues shares to the public it is very unlikely that the public apply for the exact number of
shares issued. Application can either beyond or below the actual number of shares issued, depending on the
reputation of the company of attraction of the offer. When the application received exceed the issue it is said to
be “over subscribed”. The company has the following options in dealing with the over-subscription.
1. The company can reject the excess application with refund of application money.
2. It can make a pro-rata allotment, which is proportionate allotment on the basis of number of applications and
the number of shares issued.
3. It can work out a combination of the above two options.
5. State any three purposes for which ‘securities premium’ can be used.

10. According to Section 78 of the companies Act 1956, amounts raised by way of securities premium can be utilized
for the following purposes:
1. Issue of fully paid bonus shares
2. Writing off preliminary expenses
3. Writing off discount on issue of shares or debentures
4. Providing for the premium on redemption of debentures
5. Writing off the expenses incurred on the issue of shares or debentures.
6. Write notes on ‘capital reserve’ and ‘reserve capital’.
Capital reserves are generated out of capital profits. A company is not allowed to utilize these reserves for
paying dividends. Following are the common source of capital reserve in a company:
i) Profits prior to incorporation
ii) Profit on the reissue of forfeited shares
iii) Profit on sale or revaluation of fixed assets; and
iv) Profit on purchase of business.
Reserve Capital is not a generated reserve. This only a part of uncalled portion of issued capital, which a
company has decided not to call unless it goes into liquidation. This arrangement indirectly assure the creditors
that the shareholders shall be liable to pay additional amount in the event that the company does not have
enough assets to settle the creditors claim in the event of liquidation of the company. However, this method is
hardly practiced in real life, because the company can offer more meaningful assurance to creditors without
keeping the shares partly paid up.
7. Distinguish between Capital Reserve and Reserve Capital

11. Basis Capital Reserve Reserve Capital
1. Meaning Capital reserve is generated out of Reserve capital is not a reserve generated. It
capital profits is only capital not to be called up unless the
company goes into liquidation.
2. Disclosure
Capital reserve is disclosed in the Reserve Capital is not mentioned in the
balance sheet of the company balance sheet.
3. Availability
Capital reserve is readily available Reserve capital is available only during
for writing off capital losses. liquidation process
4. Application of reserve
Capital reserve is retained in the Reserve capital is not retained in the existing
5. Special Resolution existing assets of the company assets of the company.
Capital reserve is created without A special resolution should be passed to set
any resolution aside reserve capital.
8. Write a note on the issue of shares for consideration other than cash.
a. Normally shares are issued for cash. But a company can issue shares for consideration other than cash. For
example a company purchases fixed assets and issues shares to the vendor instead of paying cash or issues
shares in settlement of loans or other creditors. In these transactions the company does not receive cash directly
but it receives benefits equivalent to cash by way of assets or settlement of liabilities.
Issue of shares in this case also can be made at par, premium or discount. The value of assets purchased or
liabilities settled will be considered equivalent to cash received in normal transactions and the amount of
discount premium or discount will be worked on that basis.
8. What is meant by private placement of shares?
Issue of shares under private placement implies the issue of shares to a selected group of persons. Private
placement is an issue that is not a public issue. In order to make private placement, a company should pass a
special resolution to that effect. If the number of votes cast in favour of private placement is not sufficient to
pass a special resolution, but more than the number of votes cast against, the directors can approach Central
Government for approval, stating that the proposed private placement is most beneficial to the company.
9. Distinguish between equity and preference shares.

12. Equity Shares Preference Shares
1. Equity shares do not carry any assurance as Preference shares are issued with a conditional
to dividend payment assurance regarding and a prescribed rate of
dividend
2. Equity share holders have voting rights to Preference shareholders have no voting rights
elect directors
3. In the event of liquidation of the company, Preference shareholders get a priority over equity
equity shareholders get what money left after shareholders in repayment of capital in the event
settling all other claims of liquidation of the company
4. Equity shares are not redeemed or taken There are redeemable preference shares, which
back by the company. Once they are issued, the company can pay off
they remain permanently with the company
10. Can forfeited shares be reissued at discount? If yes, to what extent?
A forfeited share can be reissued at discount. The amount of capital paid by the previous shareholder is
retained in the share forfeiture account. A forfeited share can be reissued at discount to the extent of amount so
retained on that share reissued. In case the share was originally issued at discount, the old discount can be
allowed in addition to the amount available in the forfeiture account.
11. Explain pro-rata allotment of shares
Pro-rata allotment means proportionate allotment. When there is over subscription of applications, the company
has the option to either reject the excess applications or to issue lesser number of shares on the applications
adjusting the excess application money in to the amounts due at subsequent stages. The second option is
known as pro-rata allotment.
12. What is meant by forfeiture of shares?
Normally a company is not allowed to cancel or take back its shares. But when a person fails to pay the
allotment money or call money due on a share, the company is allowed to withdraw those shares and reissue
them to another party. Forfeiture is withdrawal of shares due to non-payment of dues by the shareholder.
i. Capital representing the forfeited shares removed from share capital account
ii. Unsettled balances in temporary accounts such as Share Allotment, Share Call etc. (or calls in
arrears account) are wiped out from the books.
iii. The paid up portion the forfeited shares is transferred from the capital account to a separate account

13. called ‘Share Forfeiture Account”.
13. Explain the accounting treatment of forfeiture of shares, when they have been issued at a discount.
Accounting treatment on forfeiture of shares will vary according to the conditions under which they have been
issued. Shares issued at par, premium and discount are treated differently at the time of forfeiture.
When the shares have been issued at discount the capital representing the shares to be forfeited includes
discount as well. When we reverse the capital the calls in arrears as well as the discount accounts have to be
credited to clear those balances from the account. When the company reissues the shares issued at discount it
is allowed to reinstate the discount that was originally allowed.
14. Explain the accounting treatment of forfeiture of shares when they have been issued at premium.
Accounting treatment on forfeiture of shares will vary according to the conditions under which they have been
issued. Shares issued at par, premium and discount are treated differently at the time of forfeiture.
When shares are issued at premium and the premium has been collected by the company before forfeiture, no
special treatment is required for the premium portion. The shares can be treated as shares issued at par, on
which the capital is debited and the portion of capital received is credited to share forfeiture account and capital
not received credited to calls in arrears account.
However if the premium is not received, the premium account should be reversed along with the capital account
at the time of forfeiture. This is because the premium not collected inflates the calls in arrears account and a
mere reversal of capital account will not be enough to wipe out the calls in arrears account.
15. Where will you show the ‘discount on issue of shares’ in the balance sheet?
Discount on issue of shares is treated as expenditure to be written off. This is placed on the assets side of the
balance sheet under the heading Miscellaneous Expenditure, along with other fictitious assets such as
preliminary expenses, commission and brokerage.
16. What is meant by private placement of shares?
Issue of shares under private placement implies the issue of shares to a selected group of persons. Private
placement is an issue that is not a public issue. In order to make private placement, a company should pass a
special resolution to that effect. If the number of votes cast in favour of private placement is not sufficient to
pass a special resolution, but more than the number of votes cast against, the directors can approach Central
Government for approval, stating that the proposed private placement is most beneficial to the company.
Don’t waste your time reading the stuff below – Out of Syllabus Items from your Text Book
What is Escrow Account?

14. The word escrow means a contract or bond deposited with a third person, who is to deliver it to the party involved in
a contract on fulfilment of certain conditions. In order to ensure that the company fulfils the obligation under buy back
it is required to open an escrow account with a merchant banker with an amount equivalent 25% of the total
obligation under buy-back scheme, where the total is not more than Rs.100 crores: and 10% of the obligations
exceeding Rs.100 crores. This account can consist of (a) cash deposit with commercial bank (b) bank guarantee (c)
deposit of acceptable securities with adequate margin against prince variance. This amount is kept as a guarantee,
and after payment of all the amounts due on buy-back scheme, it will be released to the company. In case of non-
fulfilment of obligation under buy-back, SEBI can forfeit the escrow account.
What is Preferential Allotment?
Preferential allotment is the bulk allotment to an individual, venture capitalist or a company. Preferential allotment is
made to a pre-identified buyer at a predetermined price. SEBI prescribed that the price shall be the average of highs
and lows of the last 26 weeks preceding the date on which the directors have resolved to make such preferential
allotment. Preferential allotment is made to individuals or institutions wish to make a strategic investment in the
company. They may or may not be existing shareholders. Preferential allotment can take place only if three-fourth of
the existing shareholders approve such an allotment. Shares issued on preferential allotment are not to be sold in
the open market for a period of three years. This period is known as lock in period.
What is Sweat Equity?
Sweat equity are shares issued to employees or directors of a company at reduced rate. They are issued for
consideration other than cash for such as technical know how or intellectual property. Following are the conditions to
be fulfilled for the issue of sweat equity:
1. The company must have been in business for not less than 1 year.
2. Sweat equity shares should belong to a class of shares already issued.
3. Issue of sweat should be authorized by special resolution passed by shareholders.
4. SEBI regulations should be followed where the shares are listed in a stock exchange.
What is ‘Rights Issue’?
When a company makes fresh issue of shares, the existing shareholders have the right to subscribe them in the
proportion in which they are holding shares. This condition is a safeguard that enables existing shareholders to retain
their control over the company. They have the option to accept the offer, reject the offer or to sell their rights.
Share capital is another term for equity capital. It is the funds that a company raises in exchange for
issuing an ownership interest in the company in the form of shares.
There are two general types of share capital, which are common stock and preferred stock. The

15. characteristics of common stock are defined by the state within which a company incorporates. These
characteristics are relatively standardized, and includes the right to vote on certain corporate decisions,
such as the election of a board of directors. In the event of a corporate liquidation, the common
stockholders are paid their share of any remaining assets after all creditor claims have been fulfilled. If a
company declares bankruptcy, this usually means that the holdings of all investors are either severely
reduced or completely eliminated.
Preferred stock is shares in the equity of a company, and which entitle the holder to a fixed dividend
amount by the issuing company. This dividend must be paid before the company can issue any dividends to
its common shareholders. Also, if the company is dissolved, the owners of preference shares are paid back
before the holders of common stock. However, the holders of preference shares do not usually have any
voting control over the affairs of the company, as do the holders of common stock.
The types of preferred stock are:
• Callable. The issuing company has the right to buy back these shares at a certain price on a certain
date. Since the call option tends to cap the maximum price to which a preferred share can
appreciate (before the company buys it back), it tends to restrict stock price appreciation.
• Convertible. The owner of these preferred shares has the option, but not the obligation, to convert
the shares to a company's common stock at some conversion ratio. This is a valuable feature when
the market price of the common stock increases substantially, since the owners of preferred shares
can realize substantial gains by converting their shares.
• Cumulative. If a company does not have the financial resources to pay a dividend to the owners of
its preferred shares, then it still has the payment liability, and cannot pay dividends to its common
shareholders for as long as that liability remains unpaid.
• Non-cumulative. If a company pays a scheduled dividend, then it does not have the obligation to
pay the dividend at a later date. This clause is rarely used.
• Participating. The issuing company must pay an increased dividend to the owners of preferred
shares if there is a participation clause in the share agreement. This clause states that a certain
portion of earnings (or of the dividends issued to the owners of common stock) will be distributed
to the owners of preferred shares in the form of dividends.
Primary and Secondary Market
Posted in Definitions on Mar 25, 2008
For the shares, its possible for investors to buy them from two different sources. From the company itself
and then from other investors. First one is called the Primary Market and the later is known as Secondary
Market.
PRIMARY MARKET

16. This is the market where initial shares and bonds are sold by companies themselves directly and hence the
proceeds of the same goes to them, the issuer. This is the place where the company gets cash for selling its
financial assets
SECONDARY MARKET
This is the place where shares and bonds are bought by investors from other investors. This is the place of
high activity when compared to the primary market. It is a organized market for securities. New York
Stock Exchange (NYSE), Bombay Stock Exchange (BSE),National Stock Exchange NSE, bond markets,
over-the-counter markets, residential mortgage loans, governmental guaranteed loans etc. are some
examples.
Hybrid securities are a broad group of securities that combine the elements of the two broader groups of
securities, debt and equity.
Hybrid securities pay a predictable (fixed or floating) rate of return or dividend until a certain date, at
which point the holder has a number of options including converting the securities into the underlying
share.
Therefore, unlike a share of stock (equity) the holder has a 'known' cash flow, and, unlike a fixed interest
security (debt) there is an option to convert to the underlying equity. More common examples include
convertible and converting preference shares.
A hybrid security is structured differently and while the price of some securities behave more like fixed
interest securities, others behave more like the underlying shares into which they convert.