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Equity Shares: Classification, Benefits and Drawbacks

IndianMoney.com Research Team | Posted On Monday, March 09,2020, 05:14 PM

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Equity Shares: Classification, Benefits and Drawbacks

 

 

What are Equity Shares?

These represent part-ownership of a Company. Equity shareholders are the owners of a firm. Equity shareholders enjoy voting rights, rights on profit and shares of the company.

Features of Equity Shares:

  • Investors enjoy voting rights.
  • Investors are the real owners of the firm.
  • Shares are transferable in nature.
  • Shareholder’s liability is limited to the extent of their investment.

There is no obligation on dividend payment, however if the company make profits, dividend will be paid out.

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See Also: Return on Equity: Definition, Formula, and Calculations

Equity Shares: Classification, Benefits and Drawbacks

Classification of Equity Shares:

Based on various factors, equity shares are classified as:

  • Authorized share capital: This is the maximum stock units that a company can issue as per the memorandum of association or article of association of the organization.
  • Issued share capital: The number of shares issued by the company to shareholders or in simpler terms it is that part of authorized capital which a company is allowed to sell via shares.
  • Subscribed share capital: It is not necessary that all the issued capital must be bought by investors. Part of the issued capital that is subscribed by the investors is termed as subscribed share capital.
  • Paid up capital: It is the money received by a firm in exchange for selling subscribed shares.
  • Bonus shares: Current shareholders are given additional shares based on the number of shares held by them.
  • Rights shares: Shares issued by the company to its current shareholders, to protect ownership rights. The number of shares issued will be in proportion to shares held by them.
  • Sweat equity shares: As the name implies, these are shares issued as a reward for hard work. This could be to employees or directors. If a person provides exceptional know how or intellectual property rights for the betterment of the organization, then the company might opt to appreciate their effort by giving them shares of the company.

See Also: Issuance Of Shares

Benefits of Equity Shares:

  • Voting rights: Equity shareholders attain ownership stake in the firm as a result of which they are granted voting rights.
  • No fixed dividend: This is an advantage to the issuers of the shares. There is no obligation on the company to pay dividends to the shareholders. Dividends are paid only if there are profits.
  • Value appreciation: When a company makes profits, share value appreciates and this means equity shareholders stand to gain.
  • Right over assets: A company can issue shares without giving any rights on the assets of the company.
  • Liquidity: Equity shares can be easily sold anytime, which makes it a highly liquid investment.
  • Permanent source of capital: These shares are a means of permanent source of capital to the company.

See Also: What Are Equity Shares?

Drawbacks of Equity Shares:

  • Management issues: Issuing equity shares implies that the company has new owners. This means more number of people are involved in the management.
  • Unstable returns: Equity shares do not give stable and safe returns. It depends on the company’s performance. That is why investors who want to have a steady income choose fixed income over equity shares.
  • Cost: The cost involved in issuing and underwriting equity shares are higher when compared to preference shares and debentures.
  • Overcapitalization: Excess equity financing leads to overcapitalization. In this case, funds may not be used efficiently.

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