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Usually, the proprietors or promoters of a company contribute equity funding as the first source of capital. However, a business needs more funding to grow after a certain point. So, to raise funds, the company looks for a limited group of investors, such as friends, family members, venture capital firms, mutual funds, or other investors. Then, they buy new equity shares from the company, making more money.
What is equity share?
Equity share is a long-term source of financing for any business. These non-redeemable shares are issued to the general public. Investors in these shares can vote, share in profits, and claim the company’s assets. The value of equity shares can be represented in many ways, including par value, face value, and book value.
For an owner, these shares represent certification of ownership in the business, authorising investors to a percentage of the company’s net income and a residual claim on the company’s assets at the time of liquidation.
Features Of Equity Shares:
Permanent in existence – In nature, these shares are permanent. This means that these shares are a company’s permanent assets, and they are only returned upon its closure.
Transferable and dividends are paid out – This is another characteristic of equity shares. You have the option of transferring ownership of such shares to another individual. Also, notice that dividend payments are dependent on the company’s surplus funds. So, if a corporation doesn’t make enough money, it may not pay dividends to its shareholders.
Possibility of high returns – Because equity shares carry a higher level of risk, they also have a higher potential return on investment. Since these stocks provide more significant profit opportunities, they are suitable for investors with increased risk tolerance.
Types of Equity Shares
There are numerous types of equity shares based on various factors. They are classified into the following categories:
Authorised Share Capital: It represents the maximum amount of funds a business may issue. Companies may periodically increase it.
Issued Share Capital: It refers to the share of authorised capital that the company makes available to investors.
Subscribed Share Capital: It is the portion of issued capital accepted and agreed upon by an investor.
Paid Up Capital: It refers to investors paying a portion of the subscribed capital. Paid-up capital is the money that a corporation contributes to the business.
Rights Shares: These are the shares that a corporation issues to its current shareholders.
Bonus Shares: Bonus shares are issued to owners as a dividend.
Sweat Equity Share: Sweat equity shares are granted to outstanding employees or directors of the organisation to recognise their remarkable contributions to the company.
What Is The Purpose Of Issuing Equity Shares By A Company?
The principal objective of issuing equity shares is raising funds from investors. The capital raised by the business can be utilised for a variety of purposes, including the following:
The acquisition of a new enterprise
Establishment of future cash reserves
Product research and development
Expansion and growth in new markets or locations
Paying off existing obligations
Introducing innovative products and services
Investor Benefits of Equity Shares:
1. Liquidity:
Investors can readily buy and sell equity shares on the stock market. Investors benefit from this high liquidity by acquiring and selling shares more quickly if the company does not perform as expected.
2. Long-term wealth generation and high returns:
Equity shares have consistently given inflation-beating returns, making them a rare investment choice. Moreover, equities have achieved a compound annual growth rate of 17.60 per cent over the last decade, which is far higher than other investment options.
3. The right to vote:
When you purchase equity shares, you acquire voting rights. This permits investors to participate in the decision-making process for corporate policies and significant business decisions. An investor’s power increases when they possess more equity shares.
4. Limitations on legal liability:
Equity shareholders do not have any significant legal liability. Thus, if the company encounters legal difficulties, the shareholders are in no way liable.
What Motivates Investors to Purchase Equity Shares?
Investors always search for new ways to increase the value of their investments. Furthermore, equity shares have always given the best returns out of all other types of investments.
As a result, investors acquire equity shares to:
Contribute to the company’s growth
Acquire bonus shares to diversify their holdings
Obtain voting rights and participate in important decisions.
Conclusion:
In brief, the meaning of equity shares is the long-term money that companies get from their shareholders. These shares are issued to the general public by corporations. Generating wealth through equities is quite simple. All that is required is to choose the appropriate stock and make an investment in it. However, locating high-quality stocks is challenging. A thorough understanding of the stock market’s fundamentals is required.
