Equity Share: Features, Types, Advantages, Disadvantages
Before starting with Equity Share let us understand what Shares mean? And also, why business institutions issue shares. After that, we will read about what Equity Share is.
What is Share:
Shares are the units of ownership or financial interest of any business organization that, if declared in the form of a dividend, then they all will have an equal distribution of profit.
The Shares of any company can be in the form of Mutual Funds, Real Estates, Limited Partnership.
Majorly 2 Types of Shares Issued by Companies:
1. Common Stocks
Here the ownership comes with the voting right. Common Stockholders can use their voting rights as and when required for selecting Board members or to decide anything for the company.
Here the Dividends are paid by the company but it is not always guaranteed. If the business is successful then this stock appreciates the most and again if the business does loss or goes bankrupt then they have to bear the loss.
At the time, Common Stockholders lose their entire capital if the company gets bankrupt.
2. Preferred Stocks
They are similar to bonds that don’t come with voting right. They guarantee a fixed dividend to the Stockholders.
If the company goes bankrupt, then before the Common Stockholders, they can claim their assets, as they have preference over the assets.
Why Companies’ Issues Share?
After understanding what are shares and its type, now the question comes that why would any company issue shares, to understand it few reasons have been mentioned below:
- Financial Planning
- Business Influence.
- Tax Benefit.
Equity shares, normally known as ordinary shares, serve as long-term finance to the companies as they are legally irredeemable which also means that investors become the certified owners of the company and they can also claim the assets (during Liquidation of the company) and share the profit of the company. There is voting right in the company and also the investors are only liable to the company for the amount of Equity Shares’ issued price.
These shares can also be issued to the general public. Their values can be in terms of face value, book value, market value.
- Face value or Par value:
It is the recorded value in the books of accounts which is the value of Equity shares. At times it is similar to the Issue Price, which basically means the price at which the company wants to offer to the investors.
- Market Value:
For the companies which have been recorded in the stock exchange then the value at which the shares are sold in the market becomes the Market value of the Equity Shares.
- Book Value:
(Paid-up Capital + Reserves and Surplus – Any Loss)/(The total number of equity shares of the company)
Features of Equity Shares:
Few features of Equity Shares are mentioned below
- Voting Right:
The investors are benefitted with voting right through equity share. They can select individuals and provide them with responsibilities so that the best outcome is provided by the individuals.
- Wealth Creation:
Since equity shares are not repaid until the company is shut down or goes under liquidation, the investors can withdraw funds from a company whenever they want (because once issued they can be traded in another capital market) and it can appreciate the shares thereby, creating more wealth.
Equity shares can be transferred to another person if the shareholder wants.
Also Read: How To Buy Shares [Complete Guide]
Types Of Equity Share:
There are 7 types of Equity Shares, few of them have been discussed below:
1. Ordinary Shares:
They are issued to allocate funds for meeting with the long-term expenses of the business. Individuals with more Equity shares have more voting rights.
2. Preference Equity:
This type of Equity share does not come with voting rights or any kind of membership facility. They are basically issued to an investor as a promise to pay them their accumulated dividend before paying off the returns too ordinary shareholders.
3. Bonus Shares:
This share issued from the retained earnings of the business. Bonus shares don’t contribute in augmenting the market capitalisation value of a company.
4. Rights Shares:
This share is issued by a company to their elite investors so as to increase their stake in their business and also, they are issued at a discounted rate.
The Right share does not manipulate the controlling power of the existing shareholders, on the contrary, if the shareholder fails to exercise their right within a given time then there is a decline in their wealth.
Advantages Of Equity Share:
- Equity shares can be easily sold in the capital market due to their high liquidity quality.
- With higher profit, there is a higher dividend, and with lower profit, there is a lower dividend.
- Companies offering Equity shares don’t have any obligation regarding paying the dividend.
- For a company Equity shares are the permanent source of capital, thus they have no tension regarding repaying the liability.
- yearly dividend and appreciation in the value of their investment, are the 2 ways by which the Equity shareholders are benefitted.
Disadvantages Of Equity Share:
- The fresh issue of Equity shares reduces the earning of the existing shareholders.
- Dividend paid on equity shares is not tax-deductible expenditure.
- Equity shareholders have the highest risk in the company.
- A huge fluctuation is seen in the market price of the Equity Shares.
- Out of all sources of income, Equity shares cost the highest.
After reading in and out of Equity shares, understanding its merit, demerits, features types, one question always arises Why should one invest in Equity shares, where the shareholders have to bear the highest risk?
To answer this, we can say investing in Equity shares can be the best thing done. Few reasons have been given below to support this claim:
- High Income:
Other than capital appreciation individual’s high income from the dividends can also help them by increasing their income.
- Portfolio Diversification:
The investors who are more risk aversion in nature than risk taker, they can get more profit from investing in Equity share.
- Hedge Over Income:
Investment in equity shares can augment the standard of living of individuals with the help of asset value appreciation.
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