In the finance area, the term equity share is immensely popular among industry stakeholders.
It is also popularly known as the ordinary share, stock or simply just company shares. The term itself gives a brisk idea to people about its definition.
But, you, along with a few other people, must be knowing that every shareholder is a part-owner of the company.
Yes, it is true…!
Curious to know how it's possible?
So, let's understand everything about Equity Shares in detail:
Definition: Equity Shares
Let's start from scratch.
In any company,
equity shares are the primary finance source. An equity share also gives company investors voting rights, earn profits in the form of a dividend, and claim assets when the company gets dissolved.
equity shares are the primary finance source. An equity share also gives company investors voting rights, earn profits in the form of a dividend, and claim assets when the company gets dissolved.
Generally, the holders of the company shares are also ones with voting rights. They hold power to cast their votes in important company decisions like the appointment of board members, change in company policies, etc.
In most cases, equity finance is the first source of capital that a company receives from the owners, investors or promoters of the company.
Also, when any company is looking to expand or grow, it looks for potential investors in the form of friends, family members, venture capitalists, and small investors groups to issue them equity shares and raise capital.
Attributes of Equity Shares
The main features of equity shares include:- Equity shareholders are the actual owners of the company and also the ones who bear the highest risk of company failure.
- Equity shares are also permanent in nature with no predefined maturity period.
- Equity shares are also transferable in nature. The owners of company equity shares can transfer them to others with consideration with anyone.
- Dividends paid out to holders of equity shares are proportionate to the profits earned by the company.
- A fixed-rate of dividends is simply unavailable for owners of equity shares.
- The voting rights in important company decisions are also held by owners of equity shares.
- The liabilities of equity shareholders are mostly limited to their own investment.
Types of Equity Shares
Equity shares have numerous classes depending upon company norms. Here are some of the popular categories of equity shares:
1. Sweat Equity Shares: These kinds of equity shares are held by the owners or directors of the company. These shares are issued at discounted prices or for consideration for another kind of non-monetary rewards to company personnel for their exceptional services.
2. Bonus Equity Share: These types of shares are issued free of cost by a company to its existing shareholders. Instead of a payable dividend, the company issues bonus equity shares to its shareholders in some cases.
3. Right Equity Share: These kinds of shares are issued by the company to it's existing shareholders. Such shares are issued by the company to protect the ownership rights of the existing investors.
Equity Shares Price
Equity shares come with different prices at different places. Here are some of the important prices related to equity shares:
1. Par or Face Value: It refers to the value of equity shares maintained in any company's book of accounts.
2. Issue Price: It refers to the price at which the equity share is actually offered a company to the investors during Initial Public Offering (IPO).Generally, the issue price and face value of a share are the same for beginner companies.
3. Share Premium and Share Discount Price: it refers to the price difference between the share issuance price and its face value. In the vice versa case, it is termed as a share discount price.
4. Book Value: The formula for the book value of equity share is:
(Reserves and Surplus + Paid-up Capital – Any Loss) / (The total number of equity shares of the company)
5. Market Value: It refers to the market value of a share of the on which it is currently traded in the market ( for stock market listed companies). It is also known as the stock price or share price.
Advantages of Equity Shares
Equity shares are the first source of capital for a company. For investors, it stands list in their capital surplus list as they are the ones at maximum risk if the company faces loss.
Equity shares are also a source for prospective loan providers to check creditworthiness to the company.
Investors, willing to take a bigger risk for higher ROI invest in equity shares the most.
Dividend payment to equity shareholders is not compulsory, so there is no burden on the company.
A company can raise funds via equity shares easily without any change in its assets.
Democratic control over the management of the company is also exercised by holders of equity shares.
Equity shares biggest advantage is that these are very liquid in nature and can be sold with ease by holders.
Disadvantages of Equity Shares
Equity shares are high-risk investment instruments for investors as they do not guarantee fixed or steady returns for a given period.
The cost of raise capital via equity shares is generally higher than other sources.
The lengthy administrative process in issuing equity shares is also a setback for many companies.
The earning and voting power of existing shareholders and promoters of a company gets diluted due to the issuance of additional equity shares.
Final Thoughts
Time and again, it has been proven in the past that equity shares are one of the best long-term investments for investors in the finance sector. When it comes to outperforming low-risk investment instruments like government bonds, fixed deposits, etc. equity shares are right up there in the financial market.
Although equity shares don't guarantee fixed or steady returns for a long period as their prices can go up as well as down, so buying them is are not without risk for investors. But, with a longer period, they do provide high returns.