Methods of raising additional equity financethe same period. Compared with other types of security, ordinary shares have on
average provided the best, though often an incomplete, hedge against inflation.
Equities provide an opportunity to make investments where returns are related
fairly directly to commercial success. Direct ownership of the assets of a business norm-
ally requires investors to spend time managing those assets. It normally also exposes
investors to unlimited liability. However, equities enable delegation of day-to-day
management to the directors and allow the shareholders to protect their other assets.Riskiness of returns
Returns, in terms both of capital gains and of dividends, are not certain by any means.
Negative returns are very common over short periods, though, historically, above-
average positive returns in other periods compensate for these. A period of adverse
trading could, in theory, cause the value of a particular business’s ordinary shares
to fall to zero, losing the shareholder the entire amount invested in those shares.
Extensive losses of value of the shares of particular businesses are by no means rare.
For example, the shares of the bank Northern Rock plc fell from more than £12 a share
in January 2007 to less than £1 a share by January 2008.Ease of liquidating the investment
Typically, when investors take up part of an issue of new equity of a business, they
have no particular thoughts of the business ever repaying that investment. However,
the average investor would be reluctant to take up equities unless it were clear that
there would be the opportunity to liquidate the investment in some other way. This is
where the secondary capital market comes in. It is clearly in the interest of the busi-
ness to have its ordinary shares regularly traded on a recognised stock exchange so
that the facility to liquidate the investment exists.Equities and personal tax
In the UK, dividends are taxed as incomein the hands of the shareholder, at marginal
rates up to 40 per cent. Capital appreciation is subject to capital gains tax at rates sim-
ilar to those applied to income.Degree of control
Ordinary shares typically carry voting rights. This puts shareholders in a position,
perhaps acting together with other shareholders, to apply pressure to the business’s
senior management on any matter of concern.8.3 Methods of raising additional equity finance
There are broadly three ways of raising new equity finance. These are: retaining profits
rather than paying them out as dividends; making issues of new shares to existing
shareholders; and making new share issues to the public. Evidence shows, despite some
fluctuation from year to year, the clear dominance of retained profits over other methods.
Over recent years, new shares issued to existing shareholders as rights issues have
tended to be more important, in terms of value, than issues to the general public.Retained profit
It may seem surprising to mention retained profits as a source of new equity finance.
However, profits certainly lead to a net increase in funds, and retaining these, or part