Understanding Equity Shares and Their Role in Business
Equity shares, also called ordinary shares, represent a stake in a company, giving shareholders part-ownership and a share in the company’s profits through dividends. Equity shareholders also have voting rights, allowing them to influence key company decisions during shareholder meetings. Unlike debt instruments, equity shares do not offer fixed returns, as their value depends on the company's performance and market fluctuations.
For businesses, equity shares are a crucial source of long-term capital, supporting growth and expansion. For investors, they are a preferred option due to the potential for wealth creation and involvement in the company. This page provides a clear understanding of equity shares, their features, benefits, and significance for both businesses and investors.
Every organization, whether public or private, issues different types of shares to sustain its operations and delegate management responsibilities. This also includes raising new funds for the business. To achieve this, equity shares are issued.
What are Equity Shares?
Equity shares, also called ordinary shares, are offered to the general public at a predetermined face value. They serve as a major source of investment for a company—more shares sold mean more investment inflow. In exchange, shareholders gain partial ownership of the company.
Equity shareholders have the right to vote in the company's Annual General Meetings. Since these votes influence key business decisions, they must be used wisely.
Equity Shares Capital's Characteristics
The corporation retains its equity share capital. It is only returned when the firm is shut down.
Equity shareholders have the right to vote and elect the company's management.
The dividend rate for equity capital depends on the availability of surplus funds. However, the dividend rate is not fixed.
The Goals of Financial Management
Financial management's main goal is to maximise shareholder wealth by increasing the current market value of equity shares.
Increase the Value of the Company's Stock
The basic goal of financial management, commonly known as "the wealth maximisation principle," is to achieve this.
This entails maximising the present market value of the company's equity shares, which is only feasible if funds are used efficiently to meet organisational goals.
The number of equity shares held by a shareholder multiplied by the current market value of each share equals the shareholder's wealth.
Obtaining Adequate Money at the Lowest Possible Cost
The funds must be obtained at the cheapest possible price.
The company should strive to minimize the expenses associated with securing funds.
The cost of capital plays a key role in shaping the long-term success of the financial plan.
Optimal Use of Resources Obtained
The main issue for a business is to make sure that the profits outweigh the expenditures.
This goal guarantees that available monies are used efficiently and effectively.
Ensure the Security of your Investment
The safety of the investment is the centre of a smart financial decision.
Companies must develop and preserve their financial reserves.
To receive the best return on investment, the money earned should be wisely invested.
How to Establish a Stable Capital Structure
To ensure a sound and equitable capital composition, an appropriate balance of equity and debt should be maintained.
Few Pointers of Equity Shares
Here are some key features of these shares:
These shares are permanent and are only taken back if the company shuts down for any reason. In the case of very large companies, they are considered practically permanent.
Shareholders who own these shares have the right to vote and choose the management as well as the Board of Directors. This usually happens once a year during the Annual General Meeting (AGM) or, in rare cases, during an Extraordinary General Meeting (EGM).
These shares can be transferred, meaning an existing shareholder can sell them to another person.
People holding such shares have the right to claim dividend, which is issued when the company makes profits.
Equity shareholders cannot decide the rate of dividend which they would like to get. This decision is taken by the company’s management.
The liability of such shareholders rests only on the extent of their investment.
Types of Equity Shares
Several types of equity shares exist. The most common ones are as follows:
Authorised Share Capital: This is the highest amount of capital a company is allowed to issue as shares. The limit on these shares can sometimes change based on factors like the company's profitability, the number of shares issued, legal rules, and other conditions.
Subscribed Share Capital: This refers to the part of the issued capital that investors have chosen to buy and agreed to invest in.
Paid-Up Capital: This is the portion of subscribed capital for which investors have actually made the payment. It represents the real amount of money invested in the company.
Issued Share Capital: This is the portion of the authorised share capital that the company offers to investors as shares.
Rights Share: These are extra shares given to existing shareholders as a benefit or reward for their investment. However, a company may also choose not to issue rights shares.
Sweat Equity Shares: These shares are given to exceptional employees or executives as a reward for their hard work, technical expertise, or valuable contributions such as intellectual property.
Bonus Shares: These are additional shares distributed to shareholders when the company is performing well, usually given during bonus payouts.
Equity Shares vs Preference Shares
Most companies also issue preference shares that carry some extra benefits including the right to claim a portion of the dividend first. Here are the key differences.
These should complete the basics of equity shares for students of commerce. For further knowledge on equity shares, students can look up related topics on Vedantu. Students can also participate in Vedantu’s advanced online classes for better and more effective learning.
Stock Exchanges In India
India's stock exchanges are listed below. The following is a list of Indian stock exchanges that operate:
The Bombay Stock Exchange (BSE): Established in 1875, the Bombay Stock Exchange (BSE) is the oldest stock exchange in India and Asia. It is India's largest stock exchange, with headquarters in Mumbai, Maharashtra. BSE's market capitalization was $2.8 trillion in February 2021.
National Stock Exchange (NSE): Established in 1992, the National Stock Exchange (NSE) is India's pioneering stock exchange, offering a decentralized electronic trading platform for investors. As of the latest data, the NSE boasts a market capitalization of $2.27 trillion and, similar to the Bombay Stock Exchange (BSE), is located in Mumbai, Maharashtra.
Calcutta Stock Exchange (CSE): The Calcutta Stock Exchange, often known as the CSE, was founded in 1908. Its headquarters are in Kolkata, West Bengal. The CSE has been asked to leave by the Securities and Exchange Board of India (SEBI). However, the Calcutta High Court is now hearing the case.
India International Exchange (India INX): India International Exchange (India INX) is a stock exchange based in India that was established in 2017. It was the first international stock exchange in India. It is a subsidiary of BSE and is based in Gujarat International Finance Tec-City.
The Metropolitan Stock Exchange: MSE (Metropolitan Stock Exchange) was established in 2008. The MSE is a contemporary clearinghouse that was established to handle the clearing and settlement of contracts involving a variety of asset types. Its headquarters are in Mumbai, Maharashtra.
Advantages of Equity Shares
Here are the key advantages of equity shares:
Equity shares can be easily bought and sold at any time, making them highly liquid.
When the company earns higher profits, shareholders receive higher dividends.
Every shareholder has the right to vote and influence management decisions, especially during challenging times.
Apart from receiving annual dividends, shareholders also benefit from the increase in the value of their shares over time.
Drawbacks of Equity Shares
There exist the following drawbacks or disadvantages of equity shares.
A company is not required to pay dividends every year. Whether dividends are given depends on how well the company performs.
Equity shareholders are often widely spread out, or they may own only a small portion of the company's total shares. In such cases, it can be challenging for them to have any control over the company's decisions or benefits.
Equity shareholders face the highest level of risk associated with the company.
Changes in market value can reduce the profits earned by these shareholders.
Conclusion
The general public is granted equity shares with a pre-determined face value. They offer shareholders the ability to vote at the company's Annual General Meetings. It is a company's most important source of investment since the more shares it sells, the more money it receives.
FAQs on What is Equity Share? Definition, Features, and Importance
1. What are the different types of Equity Shares?
Equity shares can be divided into several types, such as Subscribed and Authorized Share Capital, Bonus Shares, Sweat Equity Shares, Paid-up Capital, Rights Capital, and Issued Share Capital. Each category possesses unique features, benefits, and drawbacks.
2. How do Equity and Shares differ?
Although people often use these terms interchangeably, they are not the same. Equity refers to the ownership interest that shareholders have in a company, whereas shares represent the specific units that measure an individual's ownership in that company. In simple terms, shares are the building blocks of equity.
3. What are the differences between Equity and Preference Shares?
Preference shares are different from equity shares in that the former has first access to dividends and they do not have any voting rights. Equity shares represent a stake in a company and provide voting rights, a share of the dividend and a say in managerial policies.
4. Explain the capital structure concept?
The definition of capital structure is:
The combination of owner money (equity) and borrowed funds are referred to as capital structure (Debt).
More debt means more risks, but it also means more profit since it costs less. As a result, more debt should be added to the capital structure while keeping risk in mind.
Consequently, a business should optimize its risk and return while selecting a capital structure that maximizes shareholder value.
Total Capital = Debt + Equity = Capital Structure
5. What is an equity share?
An equity share is a type of security that signifies ownership in a company, where holders earn dividends and can vote in shareholder meetings.
6. What is equity share capital?
Equity share capital refers to the funds raised by a company through the issuance of equity shares, representing the ownership interest of shareholders.
7. What are the types of equity share?
The types of equity shares include ordinary shares, preference shares (convertible and non-convertible), bonus shares, and rights shares.
8. What are the features of equity share?
Features of equity shares include ownership rights, voting rights, dividend entitlement, no fixed return, and potential for capital appreciation.
9. What is the equity share capital formula?
The equity share capital formula is:
Equity Share Capital = Number of Equity Shares Issued × Face Value per Share
10. What are the advantages of equity share?
Advantages of equity shares include raising long-term capital, no repayment obligation, profit-sharing potential, and voting rights for shareholders.
11. What is the significance of equity share capital?
Equity share capital is significant as it provides long-term funding, strengthens the company's financial stability, and allows investors to participate in the company's growth.
12. How are equity shares different from preference shares?
Equity shares differ from preference shares in that they offer voting rights, have variable returns, and do not have priority over dividends or repayment.
13. Why is equity share preferred by companies?
Companies prefer equity shares to raise capital as they do not involve repayment obligations, reduce debt burden, and help in maintaining financial flexibility.
