SS1 Third Term Economics Lesson Note – Instruments of Business Finance

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WEEK 8

INSTRUMENTS OF BUSINESS FINANCE

Content

1. Definition of Business finance
2. Basic instruments for Business finance
3. Differences between shares and stocks
4. Sources of fund for Business

Sub-Topic 2:  Basic Instruments for Business Finance

DEFINITION OF BUSINESS FINANCE

Business financing involves the sourcing and management of fund by enterprise.

The basic instrument of financing business includes:

1. Shares
2. Debentures
3. Bonds

SHARES:

A Share is the individual portion of a public limited company’s capital owned by a shareholder. Shares are divided majorly into two. These are:

1. Ordinary Shares
2. Preference Shares

ORDINARY SHARES

Ordinary shareowners are normally owners of the business who hold the voting control of the company and the right to participate in the profit. They are considered last. They do not have fixed dividend. Their dividends are flexible depending on the performance of the company. There are Preferred Ordinary Shares, Deferred Ordinary shares and Non-voting Ordinary Shares. They are explained below:

Preferred Ordinary Shares

They are shareowners who have a right to a fixed dividend that must be paid after the   payment of dividends to the preference shareholders.

Deferred Ordinary Shares

They are shareowners whose rank for dividend comes after the preferred ordinary shareholders have been considered. They are entitled to profit only after ordinary and preferred ordinary shareowners have been considered.

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