Equity Share CapitalAlso known as share capital, equity financing is the strategy of generating funds for company projects byselling a limited amount of stock to investors. The financing may involve issuing shares of common stockor preferred stock. In addition, the shares may be sold to commercial or individual investors, dependingon the type of shares involved and the governmental regulations that apply in the nation where the issueris located. Both large and small business owners make use of this strategy when undertaking newcompany projects.Equity financing is a means of raising the capital needed for some sort of company activity, such as thepurchase of new equipment or the expansion of company locations or manufacturing facilities. Thealternative mode of financing usually involves what is known as debt financing. Debt financing is theprocess of borrowing money from a lender, and entering into a contract to repay the debt according tospecific terms outlined within the loan contract. The choice of which means of financing to use will oftendepend on the purpose that the business is pursuing, as well as the companys current credit rating.With the strategy of equity financing, the expectation is that the project funded with the sale of the stockwill eventually begin to turn a profit. At that point, the business not only is able to provide dividends tothe shareholders who purchased the stock, but also realize profits that help to increase the financialstability of the company overall. In addition, there is no outstanding debt owed to a bank or other lendinginstitution. The end result is that the company has successfully funded the project without going into debt,and without the need to divert existing resources as a means of financing the project during its infancy.While equity financing is an option that is often ideal for funding new projects, there are situations wherelooking into debt financing is in the best interests of the company. Should the project be anticipated toyield a return in a very short period of time, the company may find that obtaining loans at competitiveinterest rates is a better choice. This is especially true if this option makes it possible to launch the projectsooner rather than later, and take advantage of favorable market conditions that increase the projectedprofits significantly. The choice between equity financing and debt financing may also involveconsidering different outcomes for the project. By considering how the company would be affected if theproject fails, as well as considering the fortunes of the company if the project is successful, it is ofteneasier to determine which financing alternative will serve the interests of the business over the long-term.3.3.2 Preference Share CapitalAlso known as preferred shares or preferred stock, preference shares are stock options that providepayments to preferred investors before any dividends are paid to holders of common stock issued by thesame corporation. In most instances, the amount of this dividend is fixed, as opposed to the variabledividend that is available to investors with common stock. There are several benefits associated withholding these types of shares, although investors with preferred shares do not usually enjoy the samevoting privileges as investors with common shares.Two of the more prominent benefits associated with owning preference shares are the fixed dividendpayments and the senior status in the event that the issuing entity should declare bankruptcy. With thefixed amount of the dividend, investors can depend on receiving a specific amount of return on theirshares, as long as the company is generating enough profit to comply with the terms within the stockagreement that have to do with the issuing of dividends. Assuming that the company remains financiallystable and is able to maintain its market share, this means the payments are regular and easy to predict.Holders of preference shares also have precedence in the event that the corporation must undergoliquidation. Investors with preferred stock will receive some type of compensation for their shares beforeany investors with common shares. Depending on the laws that are in force in the area where the businessis located, the court of jurisdiction will often determine just how much compensation is received for eachof the preference shares. This greater claim on the assets of the company enhances the opportunity toavoid incurring a loss if and when the business fails and its assets must be liquidated in order to settleoutstanding debts to lenders and other types of creditors.While there are benefits to owning preference shares, there are also some drawbacks. Typically, investorsholding preferred stock do not participate in votes taken at general meetings. This is in contrast toinvestors with common shares, who normally do vote at those meetings. In addition, the terms of thefixed dividend payment often require that the business earn a certain level of profit before dividends areissued to shareholders of any type, especially preferred shareholders. This means that a companyoperating at a deficit may not issue payments to preference investors for an extended amount of time.While investors with preference shares will receive dividends before any payments are tendered toinvestors with common shares, holding preferred stock does not automatically guarantee that dividendswill be issued in all instances.It is not unusual for companies to issue preference shares that are considered to be convertible. Thismeans that under certain circumstances, the shares may be converted from preferred to common stockoption. Depending on the terms related to the issuance of the shares, investors may have the option torequest the conversion under certain circumstances. The terms will also allow the issuer to make theconversion should certain events in the marketplace occur that make the change in the best interests of allconcerned.