What is Equity Share Capital? Learn its Meaning, Types, Risks, Features & Formula
Investors looking to grow their wealth and expand their portfolio often turn to equity share capital. With returns generated close to 14-15% CAGR (compound annual growth rate) in the last 15 years, investing in equity capital markets can be an extremely profitable option.
Investing in equities involves buying shares of publicly traded companies. Thus, these shares are traded on both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
So, whether you’re a seasoned investor or just starting out, read on to discover how to unlock the potential of equity share capital and take your investment game to the next level.
What are Equities?
Equities, also known as stocks, represent ownership in a company. Equity refers to classes of shares that are equities, own a portion of the company and are entitled to a share of its profits. Equities are traded on stock exchanges, and their value fluctuates based on the company’s performance, market conditions, and investor sentiment. Investing in equities carries both the potential for capital appreciation and the risk of loss, making it a dynamic and essential component of financial markets.
What are Equity Shares?
Equity shares, also known as common stock or ordinary shares, represent ownership in a company. When an individual purchases equity shares of a company, they become a partial owner, or shareholder, of that company. Shareholders can vote on company decisions at annual general meetings and may receive dividends if the company distributes profits. Now, let’s discuss what equity share capital is in detail.
What is Equity Share Capital?
The meaning of equity share capital is the portion of a company’s capital that is raised by issuing shares to shareholders in exchange for company ownership.
It is a type of financial instrument that allows companies to raise funds from the public. It is a form of ownership in a company where investors purchase company shares and become shareholders. Additionally, it allows investors to participate in the growth and success of the company.
Thus, equity share capital is an important part of equity capital markets. Companies use it to raise money for operations and expansion. Thus, companies can issue equity shares through initial public offerings (IPOs). They can also go for secondary offerings such as rights issues or private placements.
Investors can benefit from this by receiving dividends, voting rights, and potential appreciation in value as the company grows over time.
Equity Share Capital Example
If a company issues 100 shares at Rs. 10 per share, the equity share capital would be Rs. 1,000. This means that the company has raised Rs. 1,000 from you since you purchased shares of its stock. The company’s profits entitle the shareholders or investors who own these shares to a portion and possess voting rights in some issues related to the company.
Why Do Companies Issue Share Capital?
When a company offers their shares to the public on a stock exchange market (a vital component of the stock market), one of the main reasons is to fuel its CapEX (Company Expenditures) requirements. These expenditures may include opening new production units, hiring new resources, getting a hold of the latest technology, etc.
Thus, when a company issues shares in a company to you, they are also giving you an opportunity to be a part of their profits and hold equity.
What are Some Undeniable Features of Equity Capital?
Equity share capital, also known as ordinary share capital, represents the ownership interest of the shareholders in a company. The features of equity share capital include:
- Ownership Rights: Equity shareholders can participate in the company’s management by electing directors and voting on important decisions.
- Dividend Rights: Equity shareholders are entitled to receive dividends as declared by the company occasionally. The payment of dividends is discretionary and subject to the availability of profits.
- Residual Claim on Assets: In the event of the company’s winding up, equity shareholders have the right to receive the company’s residual assets after all other settled obligations.
- Voting Rights: Equity shareholders have the right to vote on matters that affect the company, such as the election of directors, approval of financial statements, and major corporate actions.
- Transferability of Shares: Equity shares are freely transferable, subject to the provisions of the company’s articles of association and applicable laws.
- No Fixed Obligation to Pay Dividends: Unlike debt instruments, equity shares do not create a fixed obligation on the company to pay dividends. The payment of dividends is subject to the discretion of the company’s board of directors.
- Permanent Capital: Equity share capital represents permanent capital for the company, as there is no obligation to repay the amount raised through the issuance of equity shares.
What are the Types of Equity Share Capital?
There are several different types of equity share capital investments that investors can choose from. Let’s have a look at some of them:
- Ordinary Shares: The maximum value of shares a company is legally permitted to issue. Thus, the authorised capital represents the upper limit for raising funds through equity.
- Issued Share Capital: The portion of authorized capital that the company has issued and sold to shareholders. It’s the amount in circulation in the market.
- Unissued Share Capital: It is the authorized capital not yet offered or allocated for issuance. The company can issue these shares later, with shareholder approval.
- Subscribed Equity Share Capital: The portion of issued capital for which shareholders have committed funds by applying and agreeing to take shares.
- Called-Up Capital: It is the portion of subscribed capital that the company has requested shareholders to pay. This may not be paid all at once but in instalments.
- Uncalled Capital: The uncalled share capital amount is yet to be requested from shareholders who have subscribed. It’s the potential future liability of shareholders to pay for their shares.
- Paid-Up Equity Share Capital: Refers to the amount paid by shareholders against the shares they subscribed. It may be the total or a part of the called-up capital.
- Fixed Capital: This means the capital that remains constant, typically in a closed corporation, where shareholders cannot readily transfer their shares to others.
- Reserve Capital: Capital that cannot be distributed as dividends but serves as a backup to cover potential losses. It acts as a financial cushion for the company.
- Circulating Capital: Also known as working capital, it’s the capital used for day-to-day operations, covering short-term liabilities and ensuring smooth business functioning.
What are the Advantages of Equity Share Capital?
Equity share capital is a popular form of raising capital for businesses and has many advantages. Below, we have mentioned some of them:
- Permanent Capital: A company’s equity share capital constitutes its permanent capital, and unlike debt financing, it does not require repayment. It stabilizes the company’s capital structure and reduces financial risk.
- Cost-Effective Source of Finance: Compared to debt financing, equity share capital is a more cost-effective source of finance. This reduces the financial burden on the company and allows it to allocate more funds towards its growth and expansion.
- No Obligation to Pay Dividends: Unlike debt financing, there is no obligation to pay dividends to equity shareholders. This provides flexibility to the company in terms of dividend payments based on the company’s financial performance.
- Attracts Long-Term Investors: Equity capital share attracts long-term investors interested in the company’s growth and success. This provides stability to the company’s shareholder base and reduces the risk of sudden changes in ownership.
What are the Disadvantages of Equity Share?
Equity share capital is an important source of funding for companies, but it also comes with its risks. Two common risks associated are:
- Insufficient Capital Generation: One of the risks associated with equity share capital is the possibility of inadequate capital generation, which may result in the company’s inability to meet its funding requirements. This can happen due to market conditions, economic downturns, or poor management decisions.
- High Liabilities: Another risk associated with equity share capital is the possibility of high liabilities. Equity shareholders have residual claims on the company’s assets, meaning they are the last to be paid in the event of liquidation. This can result in losses for equity shareholders if the company’s liabilities exceed its assets.
To Wrap It Up…
In today’s dynamic business environment, where companies must constantly innovate and adapt to stay competitive, equity share capital remains a crucial funding source. While equity share capital comes with its own risks, various solutions are available to mitigate these risks, and one such solution is offered by smallcase.
smallcase provides an effective way for investors to participate in equity markets by encouraging portfolio investing. So, now you only invest in ideas you believe in with smallcase.
Start your investment journey today by investing in equity-based smallcases!
FAQs
The equity shares capital meaning is the ownership in a company. They carry voting rights and involve risks and potential for capital appreciation in the market.
Equity share capital is calculated by multiplying the number of issued shares by the face value of each share. It represents the total value of shareholders’ equity in a company.
Equity capital refers to the funds raised by a company that may issue shares to shareholders. Examples include common shares, preferred shares, and stock warrants.
Equity share capital is risk capital because the returns directly impact the profits.
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