Equity Shares¶
Equity shares, also known as ordinary shares, represent a form of ownership in a company. They are issued by joint-stock companies to the public as a means of raising long-term capital. Each unit of equity share has a specific face value, often denominated as Rs. 10 or Rs. 100, and individuals or entities who hold these shares are referred to as shareholders.
Key characteristics of equity shares include¶
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Ownership and Voting Rights: Equity shareholders are part-owners of the company and hold voting rights. This means they have a say in the company's decisions and can participate in the election of the board of directors and other important matters.
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Risk and Returns: Equity shareholders bear the highest business risk among all stakeholders. Unlike other forms of capital, such as debt, equity shareholders do not receive a fixed dividend. Instead, they are entitled to a share of the company's profits, which is distributed as dividends. If the company performs well, equity shareholders may receive higher dividends, but if it performs poorly, they may receive lower or no dividends.
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Residual Owners: Equity shareholders are often referred to as "residual owners" because they receive whatever remains as profit after all other obligations, such as debt repayments and preference share dividends, have been fulfilled.
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Foundation of Capital: Equity capital is the cornerstone of a company's financial structure. It provides stability and creditworthiness to the company, instilling confidence in potential lenders.
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No Compulsory Dividend: Companies are not obligated to pay dividends to equity shareholders. The decision to distribute dividends is made by the company's management and is subject to various factors, including profitability and financial stability.
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Fundraising without Asset Encumbrance: Equity shares allow companies to raise funds without pledging their assets as collateral. This means that equity capital does not create any charge on the company's assets.
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Democratic Control: Equity shareholders typically have the right to vote in company matters, giving them a degree of democratic control over the company's management.
Merits of Equity Shares¶
- Equity capital provides a safety net for creditors and builds the company's creditworthiness.
- It attracts investors willing to take on higher risk for potentially higher returns.
- There is no mandatory dividend payment, reducing financial pressure on the company.
- Raising funds through equity shares does not require asset collateral.
- Equity shareholders participate in the democratic governance of the company.
Limitations of Equity Shares¶
- Investors seeking a steady income may prefer other investment options.
- The cost of raising funds through equity shares is higher compared to other financing methods.
- Issuing additional equity shares can dilute the voting power and earnings of existing shareholders.
- The process of issuing equity shares involves formalities and procedural delays.
In summary, equity shares serve as a vital source of long-term capital for companies, offering a balance between risk and potential returns for investors. While they provide essential benefits, such as financial stability and democratic control, they also come with certain limitations, making them a choice that requires careful consideration for both companies and investors.
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