Equity Shares – Features, Types, Advantages & Disadvantages

TOPICS :   Business
Bhaskar Goyal
Bhaskar Goyal
Oct 20 , 2020 15 min read 165 Views Likes 0 Comments
Equity Shares – Features, Types, Advantages & Disadvantages

The business owners who invest money in the business are known as equity share capital. They possess the reward and take the risk in the business. Equity shareholders are said to be paid only when they pay a dividend to the preference shareholders along with fulfilling the future need of the company.

Equity share is also called an ordinary share in which every shareholder is a fractional owner of the organization and has the highest liabilities concerning the business.

  • The equity shares are given to the public for long term financing.
  • One cannot avail of it.
  • The equity shareholder is called the owner of the company.
  • They can regulate the management and take dividends if the company makes profits.

Specifications of Equity share

Does not contain a maturity period:- These shares cannot be availed which resembles that it has no period of maturity throughout the life of the business.

Power of control:- Equity shareholders are said to be the real owner of the company and have control over the management and have the right to make business decisions.

Voting rights:- Equity shareholders have voting rights via which they can vote to influence the business decisions.

Claim on assets:- in case of closing of the company the equity shareholders have the right to claim for the assets.

Claim on Income:- Post paying a dividend to the preference shareholder the equity shareholders have the right to take company profits.

Limited liability:- Equity shareholders have a limited liability which is the value of the share they bought. If these shareholders consist of fully paid up shares then they have no liability. 

Advantages of Equity Shares

Permanent financial source:- Equity shares have the power to carry out long term sources of finance. It is used for the provision of fixed assets as the long term financial requirements.

Lower capital cost:- Equity shareholder is said to be a lower capital cost as they can provide effective finance to the company.

Voting rights:- The decision in the company is in control of the equity shareholders who have the right to vote they can alter their decision when they want. This type of right is only in the hand of the equity shareholders.

No fixed dividend:- A business should not be obligated to pay the dividend for the equity shareholders. If the business makes profits then equity shareholders have the eligibility to get the dividend unless they are not liable to claim any dividend from the company.

Liquidity:- equity shares are liquid in nature which means that these shares can be sold in the market easily.

Disadvantages of Equity Shares 

  • Irredeemable- Equity shares cannot be availed till the life of the business.
  • No trading on equity- No feature to take benefits for trading on equity while the organization raises capital through equity.
  • Hurdles in management- As equity shareholders have control over the management thus they mistakenly create obstacles and run the business.
  • Speculation- Fortunate period speculation can create a really high or really low market trend. 

Types of Equity Shares

Authorized share capital:- it is the highest amount that an organization can raise by giving the shares through paying the registration fees. The limit is stated under the memorandum and will not be exceeded unless the memorandum of association is changed.

Issued share capital:- it is a section of authorized share capital. It is the section that is used by the company to offer the subscription to the investors which include allotment of shares to the members during any situation.

Subscribed share capital:- It is subscribed for which the investor buys on the mutually considered value and has professionally allotted it is a part of the issued share capital.

Called up capital:- the total number of called up capital is known as called up capital on the given shares and which the shareholder subscribed. It is the number of shares that were sold but not needed by the company.

Paid-up capital:- It is a part of Paid-up capital. It is the amount that the investors have to pay to the company.

Right shares:- Post issuing of the original shares to the existing shareholder with proportion to their holdings in the company. The issue of these shares is on the basis of the pro-rata to the existing shareholders. It is given to protect the holding of the existing investors.

Bonus shares:- the existing shareholders are provided with the additional shares called bonus shares excluding any additional cost. It is the part of organizations held earnings which are not issued in the form of the dividends but will transform into free shares.

Sweat equity shares:- In context to the contribution as a mode of payment which is issued at the discount to the directors and employees. It is given in the exchange of intellectual property, valuable supplements, or the reward for services.

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Keywords : equity shares shareholders Equity Shares types dematerialization of share

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