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What Are Equity Shares?

IndianMoney.com Research Team | Posted On Friday, January 11,2019, 02:23 PM

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What Are Equity Shares?

 

 

Equity shares are one of the main sources of funds for Companies. An individual can buy equity shares of any company listed on the stock exchange like NSE and BSE. All equity shareholders are part-owners of the company. Equity shareholders have the right to control management decisions of the company through the power of voting.

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SEE ALSO: Issuance Of Shares

What Are Equity Shares?

Aims And Objectives Of Equity Shares

  • Equity Shares are issued by companies to pool in investments.
  • Funds raised by a company through equity shares are used for expansion.
  • Companies decide to raise funds through Equity Shares instead of debt as they save on paying high interest.
  • Equity Shares are purchased by investors with a view of earning profits through capital gains and dividends.

Types Of Equity Shares:

Below mentioned are the different types of Equity Shares issued by the companies:

1) Equity Shares: These are the shares that are issued by the companies and listed on the stock exchange. Equity Shares are normal shares. Majority of the shares that are traded in the market are Equity Shares. Equity Shareholders can vote on important resolutions.

2) Differential Voting Rights Shares, DVR shares: DVR shares come with voting rights that are not same as Equity Shares. Voting rights vested with DVR shareholders is limited when compare to the normal Equity Shareholders. Differential Voting Rights Shares are traded at lower value in the stock market.

 A company can have multiple classes of shares. Each share has an economic value as certain percentage of company stake and also a governance/control value with voting rights. Higher the voting rights, higher the hold over company.  DVRs are issued when the company wants to raise investments, but not giving the decision making rights to the investors.

DVRs help the company’s CEO stay in control over the decision making rights. Tata Motors, Pantaloon Retail, Jain Irrigation are some of the Indian companies that have DVRs. Investing in DVRs are good for those who want high returns on investment and are ready to compromise on the voting rights. DVRs give higher dividends than the normal shares. Google, Facebook and Amazon are the popular international companies that issue DVRs. 

3) Preference Shares: These shares have special or priority rights. Dividends are distributed to Preference Shareholders at a fixed rate and are first distributed to Preference Shareholders and then to equity share holders. At the time of winding up of the company, preference shareholders enjoy first right over Company assets vis-à-vis normal shareholders. Preference Shareholders don’t have any voting rights.

SEE ALSO: Stock Tips For Tomorrow

Features Of Equity Shares

  • Potential Profit: The profits earned on equity investments are higher when compared to most other investments. Yields earned through dividend may be low, but the potential of capital gains are high. The total yields earned on equity shares are quite high over a period of time.
  • Minimum Liability: The liability of the equity shareholders when the company undergoes a loss would be directly proportional to their equity investment.   
  • Exercise Control: By investing in equity shares of a company, the investor becomes a part owner and has voting rights in the company.
  • Assets and Income: Investors are entitled to get a portion of the company’s profits in the form of dividends on declaration of them. 

Rights Issue: When the company requires more investment, it resorts to rights issue. The company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings. 

  • Bonus Shares: When the company makes good profit, they decide to distribute bonus to equity shareholders. The bonus is distributed in the form of Equity Shares.
  • Liquidity: The equity shares held by an investor can be redeemed at any time.
  • Stock Split: Stock split means splitting a share into parts. By splitting shares, the per-share price reduces in the market and outstanding subscribers increase, which eventually increases liquidity. Stock split results in higher volumes with a number of investors leading to high liquidity of the share.

SEE ALSO: Buyback Of Shares

Advantages Of Equity Shares

  • The returns earned on Equity Shares are high, so is the risk involved.
  • Dividends received are directly proportional to the number of Equity Shares held by an investor.
  • Equity Shares are liquid in nature, and can be easily traded over stock exchanges.
  • Equity Shareholders claim ownership rights over the Company and its assets.

Disadvantages Of Equity Shares

  • Receiving dividends is subject to funds remaining post payment of tax, debentures and so on. Receiving dividends is not a certainty each year.
  • Equity Shareholders are scattered, hence they are often not able to exercise their voting rights and have almost no power over crucial management decisions.
  • Equity Share value fluctuates often in the market, thereby the risk of investment is high.
  • Issuing fresh shares depreciates the value of the equity shares held by existing investors.

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