Advantages of Equity Shares are many but there are a few points you MUST always consider before your putting your funds into action.
Everyone, investing in the share market, must have a basic idea about equity shares BUT what it is all about? How does it works and to what extent it is beneficial to the shareholders?
These are a few important questions that might arise to one’s mind. Equity shares are basically considered as a source of finance for any organization. It gives the investors rights to claim on assets and profit-sharing.
Let’s understand some of the basic aspects related to Equity shares before we talk about the advantages it provides to investors and traders.
Advantages of Equity Shares Review
To put in simple words, it can be said that equity share is an ordinary share available in the form of a part or fraction of ownership. In this, the shareholder who is a fractional owner is capable to take the maximum risk of the business.
All the holders of these shares are the company’s members and they all have the right to vote. Along with this, there are various advantages of equity shares from both the company’s and shareholder’s point of view.
To understand more about Equity Shares, it needs to accumulate more information about this topic.
Equity Shares Features
In a company, having share means that you’re having a stake in the business and you’re helping it to grow.
In the world of online share trading, equity comes with different aspects, thus, it is important to understand the disadvantages as well as advantages of equity shares before starting or joining a new business or startup.
Before entering any company, you need to ask a few questions related to stocks and shares such as how can you sell shares, what about taxes, the percentage of the ownership and many more.
There are a number of features and specifications who are associated with equity shares. These are listed below:
The shareholders of the equity shares hold the right of controlling the affairs of the organization.
It has transferable nature which means ownership of the share can be easily transferred to another person. This can be done with or without any consideration unless specified in the business documentation.
Equity shares are permanent in nature and shareholders of equity shares do not get a fixed rate of dividend.
Equity shareholder’s liability is limited to the extent of the investment.
In the company, equity shareholder is the actual owner and he/she has to bear the maximum risk of the company.
Equity shares are attributed in terms of dividend. The dividend which is payable to shareholders of the equity is an appropriation of profit.
Equity Shares Example
As everyone knows, equity share is the representation of the ownership of any company.
The theoretical concept can be difficult for people about equity shares. Thus, let’s understand the concept of these shares with an example in an easy manner.
In any company, the number of shares which is authorized to issue is formed in the corporate charter. If any company decides to sell additional shares to any shareholders then this is called raising equity.
Classified in various aspects, there are different kinds of equity shares. Some of the important types of equity shares include authorized share capital, issued share capital, paid-up capital, and subscribed share capital, bonus shares, and equity share.
For instance, if Reliance Info has a total Equity share base of 1,00,000 and you choose to buy 10 shares then, in a sense, you are 0.01% holder of the company.
Pretty simple, right?
If this looks a bit confusing, feel free to check out this detailed review on How to Buy Shares?
Equity Shares Advantages
There’s a long list of positive aspects that can be highly beneficial to the shareholders or company. If the company gets high profit then the shareholders will get dividend at a higher rate.
Both from company’s and shareholder’s point of view, there are many advantages of equity shares which are listed below:
1. Tax benefits:
This is one of the major advantages of Equity Shares. If there’s a larger yield on equity shares from an increase in capital gains then the taxes are charged at a lower rate than the incomes.
2. Profit potential:
The profit potential is higher in equity share as compared to any other investment. In some cases, you might low current dividend but the potential of the capital gain would be high.
The total yield to maturity is considered with the passage of time.
3. Value of The investment:
The equity shareholders of any company will get benefit in two different ways which include appreciation in the value of the investment and yearly dividend.
Thus, equity shares are considered highly beneficial for shareholders.
4. Liability limitation:
Here is one of the most important advantages of equity shares. Equity Share is widely fully paid to the shareholders. With these shares, they’re further liable for any failure on the part of the company to meet the obligation.
5. Increase in value:
One of the important and major advantages of equity shares is that it has the ability to increase in value. This happens by sharing in the growth of the organization profits over a period of time.
6. Liquid In Nature:
From the shareholder’s point of view, the most important advantage of equity shares is that these are very liquid in nature and can be sold with ease in the capital market.
7. Creditworthiness :
From the company’s point of view, equity shares are highly beneficial in terms of creditworthiness. If there is a larger equity capital base then it will increase the creditworthiness of the organization among the investors as well as creditors.
8. Ease of transferability:
If we’re talking about the advantages of the equity shares then ease of transferability is the major one. The shares’ owner can easily transfer his interest to someone else either to the new or existing shareholder.
Because of this reason, in several small businesses, shares are non-liquid which makes it difficult to market.
9. Right to control the management:
One of the best advantages of the equity shares is that the shareholders of the company get the right to control the management of the organization in the way he/she wants.
10. Safeguarding from inflation:
The equity share offers an excellent hedge against inflation. It does not completely compensate for the declining purchasing power but works best for inflation. But, if the rates of interest are high, the price of the share tends to be a bit depressed.
These are a few important advantages of the shares that ensure maximum benefit to the shareholder and the company.
Along with this, these shares are considered as the permanent source of capital, thus, do not get involved in any repayment liability. Also, the company is not legally bound regarding payment of dividend.
Advantages of Equity Shares to Investors
When you own equity shares of a company, you own a certain percentage the overall company as a business.
There are a few direct advantages of equity shares to investors:
When the value of the shares owned by the investor sees an appreciation, the corresponding wealth of the investor increases.
Some of the stocks pay regular dividends to their investors which is on top of the returns received on the basis of stock value appreciation.
Investors get voting rights in the company in order to select the board of directors for the company.
Advantages of Equity Shares to Company
At the same time, there are multiple advantages of equity shares to the company as well.
There is no obligation to pay dividends to investors. If the company decides to re-invest the additional capital in hand, they can go ahead and do that.
Investors buy and sell shares from the secondary market. Thus, the company is not obliged to directly pay for the shares held by the investors.
There is no interest to be paid on the amount raised through equity shares. It’s free for the company!
Advantages of Sweat Equity Shares
If there are employees in a company that are to be retained or the employees that are to be rewarded for their contribution, Sweat Equity shares is one good way of achieving that.
If a company is at least one year old, it can issue sweat equity shares to its chosen employees. This can be done by allocating these shares at a discount value of the share. This value can be even lower than the face value of the share (as per companies act 2013).
This works as an incentive for the employee as well as for the company as the employee commitment can be seen for a relatively longer duration.
Advantages of Issuing Equity Shares
When a company issues equity shares for retail traders and investors, there are specific benefits attached to this.
Some of those are listed below:
A direct boost in the reputation of the company in the industry among clients, potential clients, competition/peers, industry experts etc.
Raised funding can be used for business expansion without any interest to be paid.
Trust factor sees a direct increase leading to potential joint ventures, collaborations, business opportunities with peers, cross-industry leaders etc.
Equity Shares Limitations
In spite of a long list of advantages of equity shares, there are some limitations as well that you must be aware of. Some of the important cons of these shares are mentioned below:
If there’ll be excessive use of equity shares then it will result in overcapitalization of the organization.
From a shareholder’s point of view, the market price of equity shares fluctuates a lot. This can result in destroying the value of the investment.
The total cost of the servicing equity capital is almost higher than the cost of the debenture. Due to this reason, the expectation of the equity shareholders also rises as compared to debentures or the preference shares.
If we’re talking about the company then the payment of dividend which occurs on the equity shares is not tax-deductible.
One of the main cons of the equity shares is that the issue of equity shares will ensure underwriting commission and higher floatation expenses of brokerage.
From the company’s point of view, it can be said that the cost of equity is the highest among different sources of finance of the organization.
If the fresh shares are issued then this will cause a reduction in the earnings of existing shareholders of the company.
In any company, the equity shareholders will bear the maximum risk.
There are no certain chances of profit for the equity shareholders. The shareholders will get dividend only when if there will be any profit after paying all the expenses such as tax, debenture interest and preference dividend.
One of the important cons of equity shares is that shareholders are unable to use any effective control in the matter of the affairs of the organization.
Equity Shares Conclusion
Equity shares are mainly categorized as long-term sources of finance for any company as these are considered irredeemable in nature.
There are several advantages of equity shares that make them highly preferable. Right from ease of transferability of the shares to the right to control the company’s management, equity shareholder can enjoy a number of advantages.
Equity shareholders can also enjoy the right of voting, sharing profits and other privileges along with the ownership of the company. Other than this, some limitations are also associated with the equity shares that need to be properly considered before investing in these shares.
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