Equity Shares

Equity Shares also known as ordinary shares, which means, other than preference shares. Equity shareholders are the real owners of the company. They have a control over the management of the company.

Equity shareholders are eligible to get dividend if the company earns profit. Equity share capital cannot be redeemed during the lifetime of the company. The liability of the equity shareholders is the value of unpaid value of shares.

Features of Equity

Shares Equity shares consist of the following important features:

Maturity of the shares

Equity shares have permanent nature of capital, which has no maturity period. It cannot be redeemed during the lifetime of the company.

Residual claim on income

Equity shareholders have the right to get income left after paying fixed rate of dividend to preference shareholder. The earnings or the income available to the shareholders is equal to the profit after tax minus preference dividend.

Residual claims on assets

If the company wound up, the ordinary or equity shareholders have the right to get the claims on assets. These rights are only available to the equity shareholders.

Right to control

Equity shareholders are the real owners of the company. Hence, they have power to control the management of the company and they have power to take any decision regarding the business operation.

Voting rights

Equity shareholders have voting rights in the meeting of the company with the help of voting right power; they can change or remove any decision of the business concern. Equity shareholders only have voting rights in the company meeting and also they can nominate proxy to participate and vote in the meeting instead of the shareholder.

Pre-emptive right

Equity shareholder pre-emptive rights. The pre-emptive right is the legal right of the existing shareholders. It is attested by the company in the first opportunity to purchase additional equity shares in proportion to their current holding capacity.

Limited liability

Equity shareholders are having only limited liability to the value of shares they have purchased. If the shareholders are having fully paid up shares, they have no liability.

Advantages of Equity

Shares Equity shares are the most common and universally used shares to mobilize finance for the company. It consists of the following advantages.

Permanent sources of finance

Equity share capital is belonging to long-term permanent nature of sources of finance, hence, it can be used for long-term or fixed capital requirement of the business concern.

Voting rights

Equity shareholders are the real owners of the company who have voting rights. This type of advantage is available only to the equity shareholders.

No fixed dividend

Equity shares do not create any obligation to pay a fixed rate of dividend. If the company earns profit, equity shareholders are eligible for profit, they are eligible to get dividend otherwise, and they cannot claim any dividend from the company.

Less cost of capital

Cost of capital is the major factor, which affects the value of the company. If the company wants to increase the value of the company, they have to use more share capital because, it consists of less cost of capital (Ke) while compared to other sources of finance.

Retained earnings

When the company have more share capital, it will be suitable for retained earnings which is the less cost sources of finance while compared to other sources of finance.

Disadvantages of Equity Shares

Irredeemable

Equity shares cannot be redeemed during the lifetime of the business concern. It is the most dangerous thing of over capitalization.

Obstacles in management

Equity shareholder can put obstacles in management by manipulation and organizing themselves. Because, they have power to contrast any decision which are against the wealth of the shareholders.

Leads to speculation

Equity shares dealings in share market lead to secularism during prosperous periods.

Limited income to investor

The Investors who desire to invest in safe securities with a fixed income have no attraction for equity shares.

No trading on equity

When the company raises capital only with the help of equity, the company cannot take the advantage of trading on equity.