Equity shares are the permanent source of capital for a company. There is no requirement of creating a charge over the assets of the company when equity shares are issued. The liability of the equity shares is not required to be paid. The company does not have any obligation to pay dividend to the shareholders.
Benefits of equity share investment are dividend entitlement, capital gains, limited liability, control, claim over income and assets, right shares, bonus shares, liquidity etc. Disadvantages are dividend uncertainty, high risk, fluctuation in market price, limited control, residual claim etc.
The major advantage of investment in equity shares is its ability to increase in value by sharing in the growth of company profits over the long run.
All shares that are not preferential shares are equity shares and are also known as ordinary shares. A person who holds equity shares has the right to vote in the company’s decisions. As an equity shareholder, you are entitled to receive a claim to any profits paid by the company in the form of dividends.
Disadvantages of Equity Shares:
- If only equity shares are issued, the company cannot take the advantage of trading on equity.
- As equity capital cannot be redeemed, there is a danger of over capitalisation.
- Equity shareholders can put obstacles for management by manipulation and organising themselves.
- Share prices of ordinary shares are mainly decided by the market forces which are volatile in nature and can lead to a lot of fluctuation in the value of the shares.
- If the company goes into bankruptcy shareholders can lose the entire investment amount.
- Dividends are never fixed or predefined.
What is the benefit of equity?
The primary benefit of equity investments is the increase in the value of the initial amount invested in the business. You have less risk using equity investment to finance your business because you don’t have to take loans or use debt financing to attain the necessary funds needed for a company’s growth.
How is equity paid out?
How is equity paid out? Companies may compensate employees with pure equity, meaning they only pay you with shares. This may be a risk, but it may create a large payout for you if the company is successful. Other companies pay some shares supplemented with additional compensation.
How is equity calculated?
It is calculated by subtracting total liabilities from total assets. If equity is positive, the company has enough assets to cover its liabilities. If negative, the company’s liabilities exceed its assets.
Thus, there are two types of shares: equity shares and preferential shares.