EC2607 Lecture: Sources of Long-term Finance: Equity Finance

A complete set of vocabulary flashcards covering basic concepts, types of company finance, and methods of raising equity finance based on the EC2607 lecture notes.

Equity finance

Capital paid into or kept in the business by shareholders (the owners) which represents long-term capital carrying the greatest risk and attracting the highest returns.

Debt finance

Money invested in the business by third parties, usually for a shorter period than equity, carrying a lower risk and lower return.

Retained Profits

An internal source of finance that accounted for an average of $53\%$ of new finance for U.K. companies between 2020-2024.

Ordinary shares

The main source of equity finance representing a share of assets and profits after other claims have been met; shareholders bear the greatest risk but enjoy potential dividends and capital gains.

Preference shares

Hybrid securities falling between equity and debt that entitle holders to a fixed rate of dividend and preferential rights over ordinary shareholders regarding dividends and capital repayment.

Debentures

A form of debt finance (bonds) where interest is a tax-deductible expense, unlike preference dividends which are not tax deductible.

Cumulative preference shares

Shares that allow the right to a dividend to be carried forward if profits are insufficient in any one period.

Participating preference shares

Shares where the dividend payment is not fixed but is instead linked to corporate performance.

Primary Market

The market where companies raise finance for the first time, involving new issues and initial market quotations.

Initial Public Offering (IPO)

The process private companies undergo to offer shares of their business to the public in a new share issuance.

Secondary Market

The market where already quoted shares are traded between investors at market prices; no funds go to the firms in this market.

Seasoned Equity Offering (SEO)

A situation where a company already listed on a stock exchange decides to release additional stocks.

Angel Investors

Wealthy individuals or groups who invest large amounts at early stages of a company's development in expectation of large returns.

Venture Capitalists

Individuals or firms making substantial investments in companies with very high growth prospects, often exiting at the IPO stage.

Crowdfunding

A method where individual investors contribute small amounts via online platforms such as Kickstarter, Indigogo, and GoFundMe.

Offer for Sale

The most common method of issuing shares where the company offers shares to an Issuing House, which then offers them to the public.

Public Issue

A method where the issuing company makes a direct offer to the public, typically used for large issues by well-known companies.

Private Placing

A method where shares are sold privately to clients and market dealers rather than being offered to the public.

Tender Offer

A method where a minimum price is set and investors bid for shares; they are then allotted at a 'striking price' to successful bidders.

Rights Issue

New shares offered to existing shareholders in proportion to their current holdings, allowing them to maintain voting control and usually offered at a discount of about $20\%.$

Scrip Dividends

The issuance of new equity shares to existing shareholders instead of paying out a cash dividend, which helps preserve company liquidity.