The term equity shares are used to define the number of funds that have been put into the business by its owner who is either a single proprietor or a group of investors. Those who invest capital in the said business entity take home the profits when the business does well and at the same time, they have to bear the losses along with handling the risks associated with the development of the business.
For the shareholders, In case of equity shares are paid the returns only after those individuals who have preference shares are given the dividend by the company.
After all these balance sheets are settled, a meeting is conducted among all the shareholders in the company to decide the number of funds that will be invested in the business to meet the requirements of the clients. Equity shares are also known by the name of ordinary shares and they imply the presence of ownership in a company. With these types of shareholders, every individual is considered to be a fractional owner and they also have the most amount of liability toward the business.
Types of equity shares
Authorised capital shares – These shares refer to the maximum amount of funds that a business entity can raise by giving out shares and this amount is usually fixed.
Issued share capital – A part of authorised share capital, issued share capital refers to those shares that are put forward by the company for subscription to those individuals who invest in the business and it also constitutes all the shares that are given to the members who form an integral part of the business entity.
Subscribed share capital – Subscribed share capital refers to the part of issues share capital which is allowed legally to an investor for a pre-agreed value.
Called up capital – Called up capital refers to the total capital that can be raised in the shares that are issued to the shareholders.
Paid-up share capital – This constitutes a major part of called up capital and refers to the amount that the shareholders have paid to the company.
Right shares – To safeguard the ownership of the company, after the issue of the shares initially, the existing shareholders are offered more shares on a pro-rata basis.
Bonus shares – Without any extra investment, more than the promised shares are offered to the investors and termed as bonus shares.
Sweat equity shares – In recognised of the efforts of the employees, shares are given at a discount known as sweat equity shares.
Equity share Features
- No maturity period – Equity shares cannot be redeemed and they have to be kept in the form of shares through the lifetime as long as the business lasts. Equity shares do not have a maturity period.
- Right to control – In the case of equity shareholders, they are considered as the owners of the company. The equity shareholders have a right to decide and take part in the decision-making process of the company. They also have a right to control the management.
- Voting rights – During the various business meetings that are conducted throughout the year, equity shareholders have the right to vote and swing the final decision in their way and decide the course of action to be implemented in the business strategy.
- Transferable – The unique feature of equity shares is that they are transferable and they can be given from one person to the other with mutual consideration among all the equity shareholders.
- Claim on assets – Another right that is available only for those who hold equity shares is that they have the right to put forward their claim on the assets in a case when the company is getting shut or winding up.
- Claim on income – Those who own equity shares in a company can give a pre-decided amount of money to the preference shareholders and thereby the equity shareholders can claim their right to the profits that are incurred by the company.
- Limited liability – Those individuals who own equity shares in a company have only a limited amount of liability towards the company which is equivalent only to the number of shares owned by them.
Advantages of equity shares
- A permanent source of income – The major advantage of owning equity shares is that they can be considered as a permanent source of income. Hence these shares can be put instead of long term investment assets which include procurement of fixed income assets.
- Less cost of capital – Since they require less cost of resources in comparison to other portfolios of investment, equity shares are considered as an excellent source of finance for the company.
- Voting rights – The main advantage of equity shares is that the shareholders who own equity shares have absolute voting rights which empowers them to change or overrule any decisions that are made by the business management in a meeting.
- Liquidity – The equity shares are known to be liquid in terms of investment which denotes the fact that they can be easily and quickly sold in the financial sector when the need arises.
Disadvantages of equity shares
- Non-redeemable – Equity shares cannot be redeemed or changed into cash as long as the business lasts. It can be held only in the form of shares.
- No trading on equity – A company cannot use the funds that can be raised instead of equity shares for other investment purposes such as trading.
- Acts as an obstacle for the management – Since those individuals who own equity shares are equipped with the power to influence the business decisions as they are also considered to be owners in the company. Equity shareholders also can create obstacles for the team management by exercising their right to accept or decline a decision for the company’s future.
- Speculation – The trading of the equity shares in the company often leads to speculation whether everything is good for the business or not.
- No fixed dividend – One of the major disadvantages of equity shares is that the business is not obligated to give out dividends to all the individuals who own equity shares. Only in the case when the company makes a profit from the market, the equity shareholders are in line to get funds in the form of bonus from the company otherwise they are not eligible for claiming any dividend form the company.
Differences between equity shares and preference shares:
Equity shares indicate ownership in the company and they are the major source of income for the company. Preference shares are given to those who are the lenders to the business entity and they cannot claim any voting rights in the company. Equity shareholders can get dividend only if the company makes a profit whereas preference shareholders are given returns at a fixed rate irrespective of the company‘s performance.
get more details on equity wikipedia
Read more- https://typesoflist.com/preference-shares/