Thursday, September 21, 2023

All You Need To Know About Equity Shares!


Stocks are the most important source of long-term capital rising for companies. Shares are shares that do not have special or preferential rights with respect to annual dividend payments and capital repayments.

What is Equity Share? The money raised by issuing stocks is called “stocks”.

Since the shareholders are the actual owners of the company, this represents the owner’s equity. Capital raised through the issuance of such shares is therefore referred to as equity capital or owner funds.

Features of equity shares

  1. Venture capital: Equity investors are the primary risk bearers. You enjoy the reward and bear the risk of ownership.
  2. Shares provide permanent capital for the company and cannot be redeemed during the life of the company.
  3. To return: The profit that shareholders get is called “dividends” and varies according to the company’s earnings. 
  4. Right to Residual Income: Shareholders are called residual owners because they receive dividends only after all other claims on the company’s income and assets have been settled.
  5. Right to vote: Shareholders have voting rights in proportion to the shares they hold.
  6. Limited Liability: A capital owner’s liability is limited to the amount of capital they contributed to the company.
  7. Bonus Share- When a business split the stock to its stockholders in the dividend form, we call it a bonus share.

Benefits of equity shares

  1. Perfect for the adventurous investor: Stocks are for investors willing to take risks in search of higher returns. 
  2. No dividend obligation: There is no burden or obligation to pay dividends to the company as this is dependent on available earnings and decisions of directors and members.
  3. Source of investment funds: Shares act as permanent capital as they are repaid only when the company is dissolved.
  4. Provides creditworthiness: Equity gives the company creditworthiness and confidence from potential lenders.
  5. No asset burden: Shares do not interfere with company assets. This allows you to freely borrow assets. 
  6. Democratic Leadership: Shareholders enjoy voting rights and ensure democratic governance of the company.

Drawback of equity shares

  1. Risk of variable returns: Stocks provide variable returns and are not suitable for investors looking for stable returns on their investments.
  2. High capital cost: Generally, the cost of equity is higher than the cost of raising money from other sources.
  3. Control dilution: Additional issuance of shares dilutes the stock’s control and interest of the general public.
  4. Risk of overcapitalization: Share capital is a permanent source of capital. If the company raises excess capital as a result of faculty financial planning, the company may go dormant. In such a situation, equity capital may remain idle and underutilized.

Both Nifty and Sensex are benchmark indices that measure the overall performance of the stock market and consist of stocks of the top most liquid companies. Nifty is calculated based on the top 50 stocks traded on the National Stock Exchange, while Sensex, also known as S&P Sensex, is made up of the top 30 large-cap stocks on the Bombay Stock Exchange.

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