Equity share is a type of share that represents the ownership of a company. Equity share holders are the owners of the company and have the right to vote on important matters, such as electing the board of directors, approving mergers and acquisitions, and declaring dividends. The Equity shareholders also have the right to receive a share of the company’s profits in the form of dividends, if any.
The Equity share is also known as common stock or ordinary share. It is the most common and basic form of share issued by a company. Equity share has no fixed maturity date and no guaranteed return. Equity shareholders bear the highest risk among all the investors of a company, as they are the last to receive any payment in case of liquidation or bankruptcy. However, equity shareholders also have the potential to gain the highest returns, as they benefit from the growth and appreciation of the company’s value.
Contents
Some of the main features of equity share are:
- Ownership: Equity shareholders are the owners of the company and have a claim on its assets and earnings. They have a residual interest in the company after all the liabilities are paid off.
- Voting rights: Equity shareholders have the right to vote on important matters affecting the company, such as electing the board of directors, approving mergers and acquisitions, and declaring dividends. They usually have one vote per share.
- Dividend: Equity shareholders have the right to receive a share of the company’s profits in the form of dividends, if any. Dividends are not fixed or guaranteed and depend on the company’s performance and discretion. Dividends are also taxable in the hands of the shareholders.
- Capital appreciation: Equity shareholders have the potential to gain from the increase in the market value of their shares over time. They can sell their shares at a higher price than they bought them and earn capital gains. Capital gains are also taxable in the hands of the shareholders.
- Limited liability: Equity shareholders have limited liability for the debts and obligations of the company. They can lose only up to the amount they invested in buying their shares and not more.
- Transferability: Equity shares are freely transferable in the market. Unless there are any restrictions impose by law or by the company’s articles of association. Equity can buy or sell their shares through stock exchanges or other platforms.
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Some of the advantages and disadvantages of equity share are:
Advantages
- Permanent capital: Equity share provides permanent capital to the company, as it does not have to be repay or redeem. This enables the company to invest in long-term projects and expansion plans without worrying about repayment obligations.
- No fixed obligation: Equity share does not impose any fixed obligation on the company to pay dividends or interest. The company can retain its earnings for future growth or pay dividends as per its discretion and availability of profits.
- Flexibility: Equity share gives flexibility to the company to raise more funds from the market by issuing new shares or rights shares, without affecting its debt-equity ratio or credit rating.
- Control: Equity share enables the company to maintain control over its management and operations, as it does not have to comply with any restrictive covenants or conditions imposed by lenders or creditors.
Disadvantages
- Dilution: Equity share may dilute the ownership and earnings per share of existing shareholders, if new shares are issued at a lower price than their market value or if rights shares are not subscribed by them.
- Costly: Equity share may be costly for the company, as it has to pay higher dividends to attract and retain investors. The cost of equity is also higher than the cost of debt, as equity dividends are not tax-deductible for the company.
- Risk: Equity share involves high risk for both the company and the shareholders, as it depends on the uncertain and fluctuating market conditions. The company may face losses or bankruptcy if it fails to generate enough profits or cash flows to sustain its operations. The shareholders may lose their entire investment or face a decline in their share value if the company performs poorly or faces competition.
Conclusion
Equity-share is a type of share that represents the ownership of a company. It has various features, advantages and disadvantages that make it suitable for different types of investors and companies. Investors who are willing to take high risk for high returns may prefer equity shares over other forms of investment. Companies who need permanent capital for long-term growth and flexibility may prefer equity over other forms of financing.
FAQs
Here are some possible FAQ questions and answers about What is Equity Share:
A: Equity share is a type of share that represents the ownership of a company. Equity shareholders are the owners of the company and have the right to vote on important matters, such as electing the board of directors, approving mergers and acquisitions, and declaring dividends. Equity shareholders also have the right to receive a share of the company’s profits in the form of dividends, if any.
A: Investing in equity shares can offer several benefits, such as:
- Potential for high returns: Equity shareholders can benefit from the growth and appreciation of the company’s value over time. They can sell their shares at a higher price than they bought them and earn capital gains.
- Dividend income: Equity shareholders can receive a share of the company’s profits in the form of dividends, if any. Dividends can provide a regular source of income for the shareholders.
- Voting rights: Equity shareholders have voting rights in the company and can participate in decision-making events. They can influence the management and direction of the company and protect their interests.
- Limited liability: Equity shareholders have limited liability for the debts and obligations of the company. They can lose only up to the amount they invested in buying their shares and not more.
A: Investing in equity shares can also involve some risks, such as:
- Market risk: Equity shares are subject to market fluctuations and uncertainties. The share price may go up or down depending on various factors, such as economic conditions, industry trends, competition, consumer demand, etc. The shareholders may face a loss or decline in their share value if the market conditions are unfavorable or if the company performs poorly.
- No fixed or guaranteed dividend: Equity shares do not have any fixed or guaranteed dividend, as it depends on the company’s performance and discretion. The company may not pay any dividend or pay a low dividend if it does not earn enough profits or if it decides to retain its earnings for future growth.
- No priority in payment: Equity shareholders are the last to receive any payment in case of liquidation or bankruptcy of the company. They have to wait until all the creditors, lenders, and preference shareholders are paid off. They may not receive anything or receive a very low amount if the company’s assets are insufficient to pay off its liabilities.