Equity Shares: Understanding the Types, Features, Voting Rights, and Advantages

Last Updated : May 5, 2023, 1:02 p.m.

Collecting money for expansion and growth is the reason for issuing Equity Shares. Companies offer subscriptions for shares to raise the necessary funds. Investors contribute funds and buy stock in the business. The equity shares become a regular source of funding for the business once they are available to the general public through an IPO (Initial Public Offer). The investors take ownership of the business and get paid an income based on the number of shares they buy.

What are Equity Shares?

Different forms of funding are available for businesses. Some are long-term, while others are short-term. Equity shares are one of the crucial forms of long-term financing for businesses. Equity shares are distinct from other types of debt because they are not redeemable. The general public can purchase equity shares on the stock market and sell them there. Purchasing equity shares makes you a shareholder or the company’s proprietor. When you own equity shares and receive a cut of the company’s earnings, you are eligible to vote at the annual general meeting (AGM).

Types of Equity Shares

Understanding the types of equity shares available is necessary before making an investment decision.

Ordinary Shares

A company issues common equity shares to cover long-term debt and the company’s long-term expenditures. These activities are managed by a single investor who owns a certain proportion of equity shares. You acquire control of the business by purchasing these shares.

Preference Shares

Owners of these shares do not have ownership or voting rights. However, there is a cumulative dividend payout guarantee when purchasing preference shares before the distribution of earnings to common shareholders.

Bonus Shares

Bonus shares are extra equity shares provided to current owners as profit. The market capitalisation, which is equal to the number of shares multiplied by the market price, is unchanged despite the unrestricted issuance of these shares.

Right Shares

In contrast to bonus shares, right shares are provided at a discounted price to a company’s current stockholders. Rights shares are given as part of this limited-time offer to assist the business in covering its costs. The company only issues these shares to high-end investors. The equity stake of such investors consequently rises.

Sweat Equity Shares

Sweat equity shares are available to a company’s directors and workers for their excellent work while supplying the business with intellectual property rights, know-how, or value additions. Sweat equity is the term used to describe a person’s or business’s contribution to a business venture or other undertaking. Sweat equity typically takes physical work, mental effort, and time and is non-monetary. Sweat equity shares are used in the business world, particularly for startups and real estate and building sectors.

Features of Equity Shares

All the equity shares features are listed below:

Nature of Permanence

Equity shares are inherently enduring. The equity shares that the business issues are perpetual and irredeemable. These shares cannot be returned until and unless the firm decides to shut down operations.

Evident Returns

Equity shares can provide shareholders with sizable returns. They are a volatile and risky transactions. Returns an investor receives from these shares, however, make the danger worthwhile. They are the best option for you if you have a high-risk propensity or high-risk tolerance. Profits from equity shares can be used to build riches.

Considerable Dividends

Shareholders may receive sizable profits from equity investments. Because equity shares are transferable, it is simple to give possession of them to another investor. In addition, a dividend on the shares is provided to the equity owners. The company’s profit for that specific year and the availability of funds determine the dividend number. Therefore, whenever a business experiences a loss, that year’s dividend is not paid.

Voting Rights

Equity shareholders have the authority to choose how the business operates, including choosing the best candidates to lead it. Working with effective management generates more sales and higher dividends for its investors.

Highly Liquid in Nature

Investments in equity securities are very liquid. Despite the absence of a maturity period for equity shares, you can still readily sell your shares on the secondary market. Imagine that your business has prospered over the years; you have owned shares and taken part in rights and incentive issues. In that situation, capital appreciation allows you to create more wealth.

Limited Liability

The shareholders are not responsible for the debt obligations of the business. The price of stocks is down, and that’s the only impact.

Advantages of Equity Shares

Equity share investments have the following benefits.

High Credibility

As high-risk investments, equity shares can produce high returns. The reward increases as the danger does. When you are an investor who owns equity shares in a business, those shares also serve as collateral. So, you can use them as collateral whenever you need a loan to meet your requirements. The equity shares of a business demonstrate its creditworthiness, which facilitates the loan approval process.

Stock Split

The stock division is a further benefit of equity shares. It entails dividing stock shares into smaller pieces and lowering the price of each component. Investors gain as a result of this. Shares become more liquid as their price drops, and if the business is doing well, the high traffic will result in a price increase. The stock split helps investors in this manner.

High Liquidity

Before investing in any financial instrument, liquidity is an aspect that needs to be considered. It refers to how quickly you can turn a financial transaction into cash. The most liquid assets are equity shares, which you can sell on the market whenever necessary. Therefore, you can quickly liquidate your investment in case of an emergency.

Conclusion

Long-term equity shares are a great asset for wealth development. Note that you must remain an investor in a high-performing business for at least ten years to reap the benefits of equity. Raising money for development and expansion is the primary goal of equity share issuance.

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