Introduction to Equity Shares- Features and Advantages

What are Equity Shares?

 

Equity share allows a buyer to own a portion of a public company in exchange for taking on the risk of starting a firm. 

 

Holders of these shares are entitled to a percentage of the company's income and the ability to vote on corporate affairs such as determining corporate policy, approving takeover offers, and electing board members. 

 

Owners of equity shares benefit from the security's capital appreciation in addition to dividends. Preference shares do not have voting rights, but they have a fixed dividend rate, giving them greater stability than equity shares.

 

Holders of equity shares own rights to the company's assets in the case of bankruptcy. 

 

On the other hand, common shareholders are unlikely to get compensation in the event of a company's insolvency since they are at the bottom of the priority ladder. 

 

After bondholders, creditors, and preferred shareholders have been paid in full, they can only collect the leftover cash. 

 

Equity shares are therefore riskier than preference shares. Equity shares have the advantage of often outperforming preference shares and bonds and providing a larger long-term return.

 

(Related Blog:- What are Shares? Definition and Types)

 

 

Features of Equity Shares

 

1) Permanent Capital:

 

 Equity shares are shares that cannot be redeemed. During the company's lifespan, the money collected from equity shares is not refundable. Only in the case of the firm's liquidation or if the company agrees to buy back shares can equity shares become refundable.

 

 

2) Flexible Dividend:

 

The dividend rate on equity shares is not set. It is dependent on the amount of profit made by the firm that determines the dividend rate. The dividend is given at a higher rate if the firm produces more profit. 

 

Dividends are paid on equity shares at varying rates.

 

 

3) Equity Shareholders have the following rights:

 

• Right to vote: It is the fundamental right of equity shareholders to elect directors, amend the Memorandum and Articles of Association, and so on.

 

• Profit-sharing right: This is a crucial entitlement for equity shareholders. They are entitled to a portion of the profit when it is delivered as dividends.

 

• Right to see books: Equity shareholders have the right to examine their company's statutory books.

 

• Right to transfer shares: Equity shareholders have the right to transfer shares following the Articles of Association's procedures.

 

 

4) No Preferential right: 

 

Equity stockholders do not have any preferred treatment for dividend distribution. They are only given dividends once preference shares have been paid. Similarly, when the firm is wound up, the equity stockholders get paid last. Furthermore, if there is no excess, equity stockholders will receive nothing.

 

 

5) Power Management: 

 

The equity owners own the firm and have complete control over it. They are frequently referred to as the company's "true masters." 

 

It is because they have exclusive voting privileges. The Act gives shareholders the ability to vote in proportion to their holdings. They can use proxies to exercise their voting rights instead of attending meetings in person.

 

 

6) Risk: 

 

The company's equity stockholders carry the most risk. When a corporation has a financial crisis, they are referred to as "shock absorbers." When a company's earnings decline, so does the dividend rate.

 

 

7) Claimant for Residual Benefits: 

 

After expenses, taxes, and other costs have been paid, equity stockholders as owners have a residual right to all earnings. The last claim on the company's earnings is referred to as a residual claim. 

 

Although equity stockholders are last in line, they have the advantage of getting all remaining earnings.

 

 

8) Assets are not subject to a charge: 

 

The assets are not encumbered by the equity shares.

 

 

9) Bonus Issue:

 

 Bonus shares are given to equity stockholders as a present. Existing equity stockholders receive these shares at no cost. These are issued from earnings that have accrued over time. 

 

 

10) Right Issue:

 

 Existing equity owners may be given preference over freshly issued shares. It is when a firm requires more finances for expansion and obtains additional capital by issuing shares. 

 

It is known as the 'Right Issue.' Equity shareholders are offered the shares first, in proportion to their current holdings.

 

 

11) The Market Price: 

 

The demand for and supply of equity shares affects the market value of these shares. Profits earned and dividends issued determine the demand and supply of equity shares. 

 

When a firm makes a large profit, the market value of its stock rises. When it loses money, on the other hand, the market value of its stock drops.

 

 

Advantages of Equity Shares: 

 

 

1. No Fixed Dividend: Equity shares are not obligated to pay a dividend at a certain rate. Equity shareholders are entitled to profit if the company makes a profit, or they are entitled to a dividend if the company makes a profit, but they cannot keep any income from the firm.

 

2. Charge on the Company's Assets: Equity shares can be issued without charging the company's assets.

 

3. Repay: Equity Shares are a long-term source of money. The corporation must return equity shares when the liquidation period has passed.

 

4. Voting rights: Equity shareholders are the company's true owners, and they have full voting rights. Only equity stockholders have access to this level of power.

 

5. Gainer in Actuality:  When profits are made, the equity shareholders benefit directly from them in the form of greater dividends and a rise in the value of their shares.

 

6. Consistent funding sources:  Equity share capital is a long-term, permanent funding source used for long-term capital requirements of corporate concern.

 

7. Lower Initial Investment:  One of the most important elements that affect the company's worth is the cost of capital. When a corporation wants to expand its value, it must use more share capital since it has a lower cost of capital than alternative funding sources.

 

8. Earnings retained:  As a corporation has additional share capital, it will profit from retained earnings. They are lower-cost sources of funding when compared to other forms of credit.

 

 

Drawbacks of Equity Shares

 

1. Trading based on equity is not permitted: When a corporation raises funds only through stock, it is not permitted to take advantage of the benefits of equity trading. 

 

2. Irredeemable: During the life of the firm, equity shares cannot be redeemed. In the event of overcapitalization, it is the largest risk.

 

3. Management Roadblocks:  By exerting influence and gathering themselves, equity shareholders might eradicate hurdles in management because they are powerful enough to influence decisions detrimental to the shareholders' wealth.

 

4. Speculation's Outcomes:  During prospering periods, a greater dividend must be paid, leading to an increase in the value of shares on the market and, as a result, speculation.

 

5. Investor's Income is Restricted:  Equity shares are not attractive to investors who want to make a secure investment with a predictable return. 

 

(Related Reading:- Equity Financing: Sources, Advantages & Disadvantages)

 

Conclusion

 

Equity shares should be seen as an asset class rather than an investment vehicle by investors. Directly investing in shares necessitates a thorough examination of the company's fundamentals and financials.

 

It takes time, as well as a thorough grasp of the financial markets. So, before you go ahead and invest, make sure you grasp the fundamentals and that you are investing by your investment profile.