What is Equity Share Capital: All you need to know
What Is Equity Share Capital?
Equity share capital means the capital raised by a company by issuing the shares to the general public. Equity share capital is also known as risk capital.
- To meet the fund requirements, the companies make an offer to the public to be a part of the company by subscribing to its share. The investors give money and purchase the shares of the company. So, the capital which is raised by issuing all the shares is known as equity share capital.
- Once the equity shares are issued to the public through IPO (Initial Public Offer), they become a regular source of funds for the company. Moreover, they are not redeemed and paid off until the liquidation of the company.
- At the same time, the equity shareholders enjoy the benefits of the shares. They become the owners of the company and receive a dividend on the number of shares they purchase. And you know what? At the time of liquidation as well, they have a right to get shares in the remaining assets.
- The main objective of issuing equity shares is to raise the funds for growth and expansion. The company issues the equity shares to the public through IPO( initial public offer). When the shares get listed on the stock exchanges, you can easily buy and sell them anytime you want.
What Are The Features Of Equity Share Capital?
Now you must be a bit aware of the concept of equity share capital. To make it more clear to you, let's quickly read out its features.
The equity shares which are issued by the company are permanent and are non-redeemable. You can't give back these shares until and unless the company makes up its mind to wind up its business.
Dividend Pay-Out and Transferable
Equity shares are transferable, which means, you can easily transfer the ownership of these shares to some other investor.
In addition to this, the equity shareholders receive a dividend on the shares. The amount of the dividend depends upon the profit made by the company in that particular year and on the availability of funds. So, whenever a company incurs losses, it doesn't pay the dividend that year.
High Return Potential
No doubt, equity shares are a risky investment and they are volatile. But the risk is worth taking because the returns a shareholder gets on these shares are huge.
So, if your risk appetite is great or if you can bear the risk, then equity shares are the right choice for you. You can create wealth by the returns on equity shares.
What Are The Types Of Equity Share Capital?
After reading its features, made up your mind to invest in the equity shares? Wondering what all options are available to invest in? Have a look at the equity shares types below, you will get all your answers!
The first type of equity shares we are going to talk about is ordinary shares. The main motive behind issuing these shares is to generate the capital to fulfil the long-term expenses. The shareholders of ordinary shares have the right to participate in the management of the company and the other operations as well. The investors who have a majority of shares gain substantial voting rights in the company.
Preference Equity Shares
These types of equity shares are issued to the investors to give them a guarantee of the payment of the accumulated dividends. The preference equity shareholders enjoy preferential rights over the ordinary shareholders.
The preference shareholders have limited voting rights. Moreover, if the shares are participating, then they can benefit from the stipulated profits as well as bonus returns. But on the other hand, if the shares are non-participating, then they can't take all such benefits.
Authorised share capital
It is the maximum amount of money which a company can raise by issuing shares to fund the capital requirements. However, the companies are not obligated to issue all the authorised share capital. But they can increase the authorised share capital after complying with all the rules and regulations. It is a broad concept.
Issued share capital
This is a part of authorised share capital for which the applications are generally invited from the public. Or, the capital issued by the company to the general public. It has to be within the limits of authorised share capital. Also, the issued share capital can not be more than the authorised share capital. It is also known as called up capital.
Subscribed share capital
It is that part of issued share capital which is subscribed by the investors. The subscribed capital of a company increases when the members subscribe to the shares. The capital which is left from subscribed share capital is known as unsubscribed share capital.
It is that portion of subscribed share capital which has been called up, which means, the amount has been paid by the investors.
In most cases, the investors are supposed to pay the full amount of shares. Whereas, in some cases, the investors pay in instalments, say first call, second call etc. Those shares are known as partly paid equity shares.
Bonus shares are defined in section 63 of the Companies Act, 2013. They are additional shares issued to the existing shareholders without any extra cost. They are given in proportion to the number of shares a shareholder already owns.
Bonus shares are the accumulated earnings of a company which are not distributed in the form of dividends but are converted into free shares.
Rights issues are defined under Section 62 of the Companies Act, 2013. They are the shares which give a right to the shareholders to purchase additional shares in the company at a price less than the market price. However, right shares offer a right and no obligation. The shareholders are free to accept or reject the offer.
Sweat equity shares
Sweat equity as the name suggests is the shares which are issued by companies to their employees for their dedication and hard work. These shares are offered at a price which is less than the market price of the shares.
What Are The Benefits Of Equity Share Capital?
Let us now understand the benefits of equity share capital.
When you own the equity shares of a company as an investor, the shares act as collateral as well. So, whenever you need a loan to fulfil your needs, you can keep them as collateral. The equity shares show the creditworthiness of a company, making the approval of your loan very convenient.
Liquidity is a very significant factor that must be considered before investing in any financial instruments. It means, how easily you can convert your investment into cash.
The equity shares are the most liquid assets and you can sell them easily in the market whenever the need arises. So, in case of any emergency, you can easily liquidate your investment.
Moving on to another advantage of equity shares, which is the stock split. It means, splitting the equity shares into smaller parts and decreasing their price. This leads to the benefit of investors.
The decrease in the price of shares makes the shares more liquid and the large volume leads to a rise in the price if the company is performing well. This way, the stock split benefits the investors.
Equity shares capital offers high income to the investors. You can easily generate high income by investing in the equity shares of a company. Not only do you earn a high income but also you earn a steady dividend as well.
Here, in this blog, we have discussed equity share capital. We believe you are now well aware of the term, its features, types and benefits.
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