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 the investments which pour in. In return, the shareholders become co-owners of the organisation in question. 

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


Few Pointers of Equity Shares

The Following are Some of the Most Essential Aspects of Such Shares.

  • These are permanent in nature 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 in nature.

  • 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 rest only on the extent of their investment.


Types 

Several Types Exist. The Most Common Ones are the Following.

  • 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, number of shares issues, rule 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 which 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.

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

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

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

  4. 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 as well.

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

  2. Equity share holders 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 on an organisation’s benefits. 

  3. Equity share holders bear the highest amount of risk of the issuing company.

  4. 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 which carry some extra benefits including the right to claim a portion of the dividend first. Here are the key differences.

Judged on

Equity shares

Preference Shares

Dividend rates

Nominal; may fluctuate

Very high

Right to vote

Exists

Non-existent

Role in managerial decision-making

Has a significant say in these affairs

No such powers

Any other preferences

None

Always treated with preference- from dividend distribution to buybacks


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.

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FAQ (Frequently Asked Questions)

1. What is an Equity Share?


Ordinary shares sold to the general public at pre-determined rates to raise funds for a company are termed equity shares. Those holding such shares have the right to vote at the company’s meetings.

2. What are the Types of Equity Shares?

Several types including Subscribed and Authorised Share Capital, Bonus shares, Sweat Equity shares, Paid-up capital, Rights Capital and Issued share capital exist. Each of these types is different and carries varying pros and cons.

3. What are the Differences Between Equity and Shares?

These are often confused to mean the same but they are not. Equity represents the ownership stake of the shareholders in the company while a share is simply the numerical measurement of the stakeholder’s ownership proportion in a company. Shares are simply units of equity in a company.

4. What are the Differences Between Equity and Preference Shares?

Preference shares are different from equity shares in that while the former has first access to dividends, they do not have any voting rights. Equity shares represent a stake in a company and provide voting rights, a share of the dividend and a say in managerial policies.