Equity shares are defined as long-term financing options for firms looking to raise capital. Each equity share represents a unit of part ownership in the company. These are also referred to as common stock, or common shares, and are offered as an investment opportunity to the public.
Types of Equity Shares
- Authorized Share Capital: It is the maximum capital amount any company can issue. The ceiling on these shares can be changed at times depending on profitability, several shares issues, rules and regulations, and other criteria.
- Subscribed Share Capital: This is a portion of the issued capital that an investor accepts and agrees upon.
- Paid-Up Capital: This is a section of the subscribed capital, that the investors give. Paid-up capital is the money that an organization invests in the company’s operation.
- Issued Share Capital: That part of the authorized share capital which is offered by the company in the form of shares is termed the issued share capital.
- Rights Share: These are additional shares issued to existing shareholders as a gift or recognition of their input. A company may, however, decide not to offer any rights share entirely.
- Sweat Equity Shares: These are shares offered to outstanding executives or workers as recognition of their efforts, technical know-how, or Intellectual Property.
- Bonus Shares: These are extra shares issued when a company is in good health and during the payment of bonuses.
Advantages of Equity Shares
- Equity shares are highly liquid and can be sold at any point in time.
- The higher the profits of the issuing company, the more dividend the shareholders get.
- All shareholders have the right to vote and decide which way the management should move in times of crisis.
- Besides the yearly dividend, the appreciation of the value of shares is another way in which shareholders are benefitted.
Drawbacks of Equity Shares
- There is no guarantee that a dividend will be paid each year. It depends on the company’s performance.
- Equity shareholders tend to be very scattered or may own an insignificant percentage of a company’s total share capital. Under these situations, it may be difficult for shareholders to exercise any control over an organization’s benefits.
- Equity shareholders bear the highest amount of risk of the issuing company.
- Fluctuations in the market value tend to erode the profits made by these shareholders.