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Law for Commerce

Law for Commerce

describe the types of corporates shares and compare the use of shares to bonds and debentures in

financing a corporation

Shares represent ownership rights to a company while debentures and bonds refer to long term
debt instruments that are used by a company to borrow money from the public or private firms
mostly at a certain interest rate which is fixed. There are two main types of shares, ordinary
shares and preferential shares. Ordinary shares have voting rights and they participate on the
sharing of profits in a company. However, they have no guarantee on the profits of the company.
Preferred stock has a guarantee on profits and the shares are redeemable at the option of the
holder. They have the first right to the assets of the company in case the company goes bankrupt
before the ordinary shareholders are paid however they have no voting rights (Chandra, 2007)

Law for Commerce 2

Debentures and bonds have no voting rights in the company’s general meetings and they are
freely transferable. They are entitled to a fixed rate of interest that is guaranteed.
There are certain types of bonds that can be converted to equity shares. Convertible bonds or
debentures can be converted to equity shares at the option of the holders after the lapsed of a
stated period of time. The feature of Convertibility in bonds is a way that’s meant to attract the
customers to the product by promising ownership rights to the company in future. The other
ordinary bonds or debentures are non-convertible debentures or bonds and they cannot be
converted to equity shares but they mostly carry higher rates of interest than the convertible ones.
Ordinary shares can be issued according to different classes. Some classes can have different
number of voting rights per share. For example class A ordinary shares can have one vote per
share while class B have two votes per share.

Law for Commerce 3


Chandra, G. (2007) Company Law, 3rd Edition; McGraw-Hill Education

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