Equity shares for Financial Planning MCOM sem 1 Delhi University
Equity shares were earlier known as ordinary shares. The holders of these shares are the real owners of the company. They have a voting right in the meetings of holders of the company. They have a control over the working of the company. Equity shareholders are paid dividend after paying it to the preference shareholders. Equity shares for Financial Planning MCOM sem 1 Delhi University.
The rate of dividend on these shares depends upon the profits of the company. They may be paid a higher rate of dividend or they may not get anything. These shareholders take more risk as compared to preference shareholders.
Equity capital is paid after meeting all other claims including that of preference shareholders. They take risk both regarding dividend and return of capital. Equity share capital cannot be redeemed during the life time of the company.
Features of Equity Shares:
Equity shares have the following features:
(i) Equity share capital remains permanently with the company. It is returned only when the company is wound up.
(ii) Equity shareholders have voting rights and elect the management of the company.
(iii) The rate of dividend on equity capital depends upon the availability of surplus funds. There is no fixed rate of dividend on equity capital.
Advantages of Equity Shares:
1. Equity shares do not create any obligation to pay a fixed rate of dividend.
2. Equity shares can be issued without creating any charge over the assets of the company.
3. It is a permanent source of capital and the company has to repay it except under liquidation.
4. Equity shareholders are the real owners of the company who have the voting rights.
5. In case of profits, equity shareholders are the real gainers by way of increased dividends and appreciation in the value of shares.
Disadvantages of Equity Shares:
1. If only equity shares are issued, the company cannot take the advantage of trading on equity.
2. As equity capital cannot be redeemed, there is a danger of over capitalisation.
3. Equity shareholders can put obstacles for management by manipulation and organising themselves.
4. During prosperous periods higher dividends have to be paid leading to increase in the value of shares in the market and it leads to speculation.
5. Investors who desire to invest in safe securities with a fixed income have no attraction for such shares.
Equity shares for Financial Planning MCOM sem 1 Delhi University
These shares were earlier issued to Promoters or Founders for services rendered to the company. These shares were known as Founders Shares because they were normally issued to founders. These shares rank last so far as payment of dividend and return of capital is concerned. Preference shares and equity shares have priority as to payment of dividend.
These shares were generally of a small denomination and the management of the company remained in their hands by virtue of their voting rights. These shareholders tried to manage the company with efficiency and economy because they got dividend only at last. Now, of course, they cannot be issued and they are only of historical importance. According to Companies Act 1956, no public limited company or which is a subsidiary of a public company can issue deferred shares. Equity shares for Financial Planning MCOM sem 1 Delhi University.
FLUCTUATION IN MARKET PRICE
The market price of any equity share has a wide variation. It is always very difficult to book profits from the market. On the contrary, there are equal chances of losses.
An equity investor is a small investor in the company, therefore, it is hardly possible to impact the decision of the company using the voting rights.
An equity shareholder has a residual claim over both the assets and the income. Income which is available to equity shareholders is after the payment of all other stakeholders’ viz. debenture holders etc.
TYPES OF EQUITY SHARES
There are various types of equity shares classified based on various things.
In the financial statements of a company, equity shares are placed on the liability side of the balance sheet. They are classified into various categories which are as follows:
- Authorized Share Capital: It is the maximum amount of capital which can be issued by a company. It can be increased from time to time. Some fee is required to be paid to legal bodies accompanied with some formalities. Equity shares for Financial Planning MCOM sem 1 Delhi University.
- Issued Share Capital: It is that part of authorized capital which is offered to investors.
- Subscribed Share Capital: It is that part of Issued capital which is accepted and agreed by the investor.
- Paid Up Capital: It is the part of subscribed capital, the amount of which is paid by the investor. Normally, all companies accept complete money in one shot and therefore issued, subscribed and paid capital becomes one and the same. Conceptually, paid up capital is the amount of money which is actually invested in the business.
There are other types of equity shares discussed below:
- Rights Share: These are the shares issued to the existing shareholders of a company. Such kind of shares is issued to protect the ownership rights of the investors.
- Bonus Share: These are the type of shares given by the company to its shareholders as a dividend. There are various advantages and disadvantages of bonus shares like dividend, capital gain, limited liability, high risk, fluctuation in the market, etc.
- Sweat Equity Share: These shares are issued to exceptional employees or directors of the company for their exceptional job in terms of providing know-how or intellectual property rights to the company.
Various Prices of Equity Shares
- Par or Face Value: It is the value of a share of which it is accounted in books of accounts.
- Issue Price: It is the price at which the equity share is actually offered to the investor. Normally, the issue price and face value of a share are same in the case of new companies. Equity shares for Financial Planning MCOM sem 1 Delhi University.
- Share Premium and Share at Discount: When a share is issued at a price higher than face value, the excess amount is called premium. Contrary to it, if the share is issued at a price lower than face value, it is said to be issued at a discount.
- Book Value: It is the ratio of the total of paid-up capital and reserves and surplus divided by total no. of shares. This is the balance sheet value of shares.
- Market Value: In the case of companies listed on stock exchanges, the market value of the share is the price at which they are sold currently sold in the market.
INVESTING AND FINANCING ANGLE OF EQUITY SHARES
When talking about equity shares, there are two angles. One investor angle wherein the investor invests in equity shares and second financing angle where a company accepts the finance in the form of equity.
Equity share is a main source of finance for any company giving investors rights to vote, share profits and claim on assets. Various types of equity capital are authorized, issued, subscribed, paid up, rights, bonus, sweat equity etc. The value of equity shares are expressed in terms of face value or par value, issue price, book value, market value etc. Equity shares for Financial Planning MCOM sem 1 Delhi University.
In the world of financial and investment management, ‘equity share’ is a big word frequently used in every next discussion. Equity shares for Financial Planning MCOM sem 1 Delhi University. We call it stock, ordinary share, or shares, all are one and the same. Explaining equity shares in a page or a bunch of pages is very difficult. Let us still try to define it in as summarized manner as possible.
Normally, a company is started with equity finance as its first source of capital from the owners or promoters of that company. After a certain level of growth, more capital is required for further growth.The company then finds an investor in the form of friends, relatives, venture capitalists, mutual funds, or any such small group of investors and issue fresh equity shares to these investors.
A point comes where the company reaches a very big level and requires huge capital investment for business growth. It then offers its equity share to the general public. This is called Initial Public Offer (IPO). More such issues in future are called Follow-on Public Offer (FPO).
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