Equity shares generally represent the ownership of a company. It is raised by the issue of shares of the Company as ownership capital or owner’s funds. This is the foundation for the creation of a new company.
Equity shares are fundamental sources of capital for the company. Equity shareholders own the company and bear the unlimited risk associated with the ownership. A share is a unit of ownership.
Generally, a company is started with equity finance as its basic source of funds from the promoters of the company. After a certain level of growth, there is a need to require more capital for further growth and expansion of a business. The company then finds an investor in the form of friends, relatives, venture capitalists, mutual funds, or any such small group of investors and issue fresh equity shares to these investors.
The investors of the equity shares have the right to vote, share the profits and claim the assets of the company. The value of equity shares is expressed in various terms like par value or face value, book value, issue price, market price, intrinsic value and so on.
Equity shares give the right to the holders to claim dividends on the surplus profits of the company. The rate of dividend on the equity capital is determined by the management of the company. Equity shares are transferable in nature. They can be transferred from one person to another with or without consideration.
Type of Shares Capital of the Company:
Authorized/Nominal Share Capital: The authorized capital of a company is the maximum amount of the share capital of the company which is authorized by the Memorandum of Association of the Company. This amount can be changed with shareholders’ approval.
Issued Share Capital: The amount of its authorized capital which has been issued to shareholders to raise capital is called Issued Share Capital. Shares are most commonly issued fully paid, in which case the liability of the shareholders is limited to the amount paid on the shares; but they may also be issued partly paid, with unlimited liability, subject to the guarantee, or some other form.
Subscribed Share Capital: Subscribed share capital is that part of issued share capital which has been subscribed by investors.
Paid Up Capital: Paid-up Capital refers to the amount that has been received by the company through the issue of shares to the shareholders.
Types of Issue Prices of Shares
At Par Value: When a share is issued by the company at par when the amount collected for it is equal to the face value of the Share.
Issue of Share at Discount: When a share is issued by the company at a price that is less than the face value of the share, the share is said to be issued at a discount. The difference between the par value (face value) of the share and the amount received on the share is called discount on issue of shares.
Issue of Shares at Premium: When a share is issued by the company at a price that is more than the face value of the share, the share is said to be issued at a premium. The amount realized more than the face value of shares is called premium on shares.
Advantages of Equity Shares:
- An investor is entitled to receive a dividend from the company. It is the main source of return on his investment.
- The liability of a shareholder is limited to the extent of the investment made. If the company goes into losses, the share of loss over and above the capital investment would not be borne by the shareholders.
- Equity share capital is the long-term permanent source of finance and so can be utilized for the long-term or fixed capital requirement of the company.
- The shares of the company which is listed on stock exchanges have the benefit of any time liquidity. The shares can very easily transfer ownership.
- Equity shareholders are the actual owners of the company with all the voting rights. This is the exclusive right for the equity shareholders.
Disadvantages of Equity Shares:
- The dividend which a shareholder receives is neither fixed nor controllable by the investor. If there is a loss, there is no question of dividend.
- Equity share investment is a risky investment as compared to any other investment like debts etc.
- An equity investor is a small investor in the company, therefore, it is hardly possible to impact the decision of the company using voting rights.
- An equity shareholder has a residual claim over both the assets and the income. Income that is available to equity shareholders is after the payment of all other stakeholders.
- Equity shares are irredeemable during the lifespan of the business entity.