CFM3250 - Understanding loan relationships: issuing shares

Advantages and disadvantages

Raising finance by issuing shares might be a relatively cheap alternative but it has a variety of drawbacks for the shareholders and the company.

The company has to be legally entitled to issue shares. The company's articles of association set out what share capital it is authorised to issue. If it wants to issue more share capital it must pass a resolution in a general meeting of the shareholders.

There are many different kinds of shares ( CFM3256) which offer the company the chance to raise money on different terms.

Cash raised through the issue of ordinary shares is permanent funding. The company cannot 'repay' this financing unless it

• redeems the shares
• purchases its own shares, either in the market or privately.

The issue of additional shares dilutes the original shareholdings. If you own 60% of a company and that company issues more shares, you may lose control of the company.

The reward for investing by way of shares comes in the form of dividends and any increase in the value of the shares. The company will only have to pay a dividend if there are distributable profits available and a dividend is declared by the board and/or voted by the shareholders.

Cash raised through the issue of preference shares might leave the company in a better position for redeeming the shares or changing the control of the company, but in a worse position for rewarding the investor.