Understanding Equity Shares

Any organisation, whether public or private, issues different types of shares to stay afloat and to distribute management responsibilities, including raising fresh funds for the enterprise. For the latter purpose, equity shares are issued.

What are Equity Shares?

Also known as ordinary shares, equity shares are issued to the general public at a pre-declared face value. It acts as the biggest means of investment for a company as the more shares are sold, the more investments pour in. In return, the shareholders become co-owners of the organisation in question.

Equity shares give the shareholder the right to vote at the Annual General Meetings of the company. This right has to be exercised carefully as important business decisions are taken depending on them.

Equity Shares Capital's Characteristics

• The corporation retains its equity share capital. It is only returned when the firm is shut down.

• Equity Shareholders elect the company's management and have voting rights.

• The dividend rate on equity capital is determined by the availability of surplus capital. The dividend rate on the equity capital, on the other hand, is not fixed.

The Goals of Financial Management

Financial management's main goal is to maximise shareholder wealth by increasing the current market value of equity shares.

Increase the Value of the Company's Stock

• The basic goal of financial management, commonly known as "the wealth maximisation principle," is to achieve this.

• This entails maximising the present market value of the company's equity shares, which is only feasible if funds are used efficiently to meet organisational goals.

• The number of equity shares held by a shareholder multiplied by the current market value of each share equals the shareholder's wealth.

Obtaining Adequate Money at the Lowest Possible Cost

• The funds must be obtained at the cheapest possible price.

• The corporation should aim to keep the cost of obtaining financing as low as possible.

• The cost of capital is a critical factor in determining the financial plan's long-term performance.

Optimal Use of Resources Obtained

• The main issue for a business is to make sure that the profits outweigh the expenditures.

• This goal guarantees that available monies are used efficiently and effectively.

Ensure the Security of your Investment

• The safety of the investment is the centre of a smart financial decision.

• Companies must develop and preserve their financial reserves.

• To receive the best return on investment, the money earned should be wisely invested.

To Establish a Stable Capital Structure

To ensure a sound and equitable capital composition, an appropriate balance of equity and debt should be maintained.

Few Pointers of Equity Shares

The following are some of the most essential aspects of such shares:

• These are permanent and are taken back only in case the company shuts down for any reason. It can be assumed that for very large companies, these shares are practically permanent.

• Anyone holding these shares has the right to vote and select the management and the Board of Directors. These are usually done once a year during an AGM or at Extraordinary General Meetings, the latter type being very rare.

• These shares are transferable. That means that they can be sold by an existing shareholder to another person. 

• People holding such shares have the right to claim dividend, which is issued when the company makes profits.

• Equity shareholders cannot decide the rate of dividend which they would like to get. This decision is taken by the company’s management.

• The liability of such shareholders rests only on the extent of their investment.

Types of Equity Shares

Several types of equity shares exist. The most common ones are as follows:

• Authorised Share Capital: It is the maximum capital amount any company can issue. The ceiling on these shares can be changed at times depending on profitability, several shares issues, rules and regulations and other criteria.

• Subscribed Share Capital: This is that portion of issued capital where the subscriber has already decided and agreed to.

• Paid-Up Capital: This is the part of the subscribed capital for which only the investors pay. Thus, the paid-up capital is the actual amount that is directly infused as an investment. 

• Issued Share Capital: That part of the authorised share capital which is offered by the company in the form of shares is termed the issued share capital.

• Rights Share: These are additional shares issued to existing shareholders as a gift or recognition of their input. A company may, however, decide not to offer any rights share entirely.

• Sweat Equity Shares: These are shares offered to outstanding executives or workers as recognition of their efforts, technical know-how or Intellectual Property.

• Bonus Shares: These are extra shares issued when a company is in good health and during the payment of bonuses.

Advantages of Equity Shares

The following are the major merits of equity shares:

• Equity shares are highly liquid and can be sold at any point in time.

• The higher the profits of the issuing company, the more the dividend the shareholders get.

• All shareholders have the right to vote and decide which way the management should move in times of crisis.

• Besides the yearly dividend, the appreciation of the value of shares is another way in which shareholders are benefitted.

Drawbacks of Equity Shares

There exist the following drawbacks or disadvantages of equity shares.

• There is no guarantee that a dividend will be paid each year. It depends on the company’s performance.

• Equity shareholders tend to be very scattered or may own an insignificant percentage of a company’s total share capital. Under these situations, it may be difficult for shareholders to exercise any control over an organisation’s benefits. 

• Equity shareholders bear the highest amount of risk of the issuing company.

• Fluctuations in the market value tend to erode the profits made by these shareholders.

Equity Shares vs Preference Shares

Most companies also issue preference shares that carry some extra benefits including the right to claim a portion of the dividend first. Here are the key differences.

These should complete the basics of equity shares for students of commerce. For further knowledge on equity shares, students can look up related topics on Vedantu. Students can also participate in Vedantu’s advanced online classes for better and more effective learning.

Stock Exchanges In India

India's stock exchanges are listed below. The following is a list of Indian stock exchanges that operate:

The Bombay Stock Exchange (BSE)

The Bombay Stock Exchange, or BSE, was founded in 1875 and is not just India's but also Asia's oldest stock exchange. It is India's largest stock exchange, with headquarters in Mumbai, Maharashtra. BSE's market capitalization was $2.8 trillion in February 2021.

National Stock Exchange (NSE)

The National Stock Exchange, often known as the NSE, was founded in 1992. It is India's first stock exchange to provide investors with a decentralised electronic trading platform. According to the most recent figures, the NSE's market capitalization was $2.27 trillion. NSE, like BSE, is headquartered in Mumbai, Maharashtra.

Calcutta Stock Exchange (CSE) 

The Calcutta Stock Exchange, often known as the CSE, was founded in 1908. Its headquarters are in Kolkata, West Bengal. The CSE has been asked to leave by the Securities and Exchange Board of India (SEBI). However, the Calcutta High Court is now hearing the case.

India International Exchange (India INX)

India International Exchange (India INX) is a stock exchange based in India that was established in 2017. It was the first international stock exchange in India. It is a subsidiary of BSE and is based in Gujarat International Finance Tec-City.

The Metropolitan Stock Exchange 

MSE (Metropolitan Stock Exchange) was established in 2008. The MSE is a contemporary clearinghouse that was established to handle the clearing and settlement of contracts involving a variety of asset types. Its headquarters are in Mumbai, Maharashtra.

Conclusion

The general public is granted equity shares with a pre-determined face value. They offer shareholders the ability to vote at the company's Annual General Meetings. It is a company's most important source of investment since the more shares it sells, the more money it receives.

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