Over the course of time, it can be seen that equity finance has emerged as one of the top-notch choices of financing when it comes to enterprises looking to raise money for their operations.
Equity financing can be described as a way of raising finance by the company, against a share of ownership in the company. In this regard, it can be seen that equity shares can be regarded as proof of investment that the investor has made in the company.
Equity Shares are also referred to as ordinary shares. These shareholders have voting rights and can be regarded as the priority shareholders because they are prioritized higher as compared to other types of shareholders that might exist.
Features of Equity Shares Capital
Equity Shares Capital can be defined as an important resource that can help companies raise finance by selling ownership within their company. The features of share capital include the following:
- Equity Share Capital tends to remain with the company, and it is not supposed to be paid back to the company.
- Equity Shares having voting rights, against which they are able to select who gets to manage the company.
- The rate of return on equity shares tends to be contingent on the profitability of the company. Unlike debt-equity, equity financing does not require a fixed financial charge.
Types of Equity Shares
- Authorized Share Capital: This can be referred to as the highest amount that the company can issue by selling its shares in the market. This amount is allocated by organizations that oversee the functionality of companies.
- Issued Share Capital: Issued Share Capital can be referred to as the approved amount of capital that an organization gives to the investors.
- Subscribed Share Capital: As far as subscribed share capital is concerned, this is a portion of issued capital that the investor accepts to pay for.
- Paid-up Share Capital: Paid-up Share Capital is referred to as the portion of issued capital that an investor accepts and further agrees upon.
- Right Share: As far as right shares are concerned, this amount of shares is created to prevent the previous shareholding structure of the company from being diluted.
- Sweat Equity Share: Sweat Equity can be described as the number of shares that are allocated to the personnel of the company, who tend to stand out in terms of the effort they have put in.
Advantages of Equity Shares
A company can choose to opt for equity shares because of a number of merits that it has to offer in comparison to other sources of finance that the company has.
Firstly, it can be seen that capital raised by equity shares does not have to be paid back. Therefore, this principal amount can be saved by the company. In the same manner, it can also be seen that this particular amount can be utilized across any place where the company needs to utilize this amount.
In other cases, particularly in debt financing, the amount cannot be alternatively used, except for the purpose based on which the loan was obtained. Therefore, it offers a relatively higher degree of flexibility for the company.
In the same manner, the fact that equity shares do not have a fixed financial charge since the return is highly variable contingent on the profitability of the company.
In the same manner, it can also be seen that equity shares tend to create a positive impact on the financials of the company, because of the reason that it shows that highly leveraged companies tend to have a negative impression on the market outlook.
In the same manner, with equity shares, the company does not need to offer collateral because of which it is easier to raise finance through equity finance in the case where companies do not have any assets to offer as collateral.
Equity Shares can be regarded as proof of ownership in the company, which is paid to the investors as a result of their purchase of shares. Equity shares are held by the companies that have issued share capital to different investors as a means of raising finance.
Equity shareholders finance the company’s operations against a percentage of ownership within the company. Hence, it can be seen that companies prefer raising finance through equity because of the various advantages behind equity financing.
However, it must not be ignored that there are certain pitfalls of equity shares too that must be taken into consideration by the company, predominantly on grounds of cost of IPO, as well as taxation.