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Equity share is a main source of finance for any company giving investors rights to vote, share profits and claim on assets. Various types of equity capital are authorized, issued, subscribed, paid up, rights, bonus, sweat equity etc. The value of equity shares are expressed in terms of face value or par value, issue price, book value, market value etc.
In the world of financial and investment management, ‘equity share’ is a big word frequently used in every next discussion. We call it stock, ordinary share, or shares, all are one and the same. Explaining equity shares in a page or a bunch of pages is very difficult. Let us still try to define it in as summarized manner as possible.
Normally, a company is started with equity finance as its first source of capital from the owners or promoters of that company. After a certain level of growth, more capital is required for further growth.The company then finds an investor in the form of friends, relatives, venture capitalists, mutual funds, or any such small group of investors and issue fresh equity shares to these investors.
A point comes where the company reaches a very big level and requires huge capital investment for business growth. It then offers its equity share to the general public. This is called Initial Public Offer (IPO). More such issues in future are called Follow-on Public Offer (FPO).
They are categorized under long-term sources of finance because legally they are irredeemable in nature. For an investor, these shares are a certificate of ownership in the company by virtue of which investors are entitled to share the net profits and have a residual claim over the assets of the company in the event of liquidation. Investors have voting rights in the company and their liability to the company is limited to the amount of investment.
There are various types of equity shares classified based on various things.
- Authorized Share Capital: It is the maximum amount of capital which can be issued by a company. It can be increased from time to time. Some fee is required to be paid to legal bodies accompanied with some formalities.
- Issued Share Capital: It is that part of authorized capital which is offered to investors.
- Subscribed Share Capital: It is that part of Issued capital which is accepted and agreed by the investor.
- Paid Up Capital: It is the part of subscribed capital, the amount of which is paid by the investor. Normally, all companies accept complete money in one shot and therefore issued, subscribed and paid capital becomes one and the same. Conceptually, paid up capital is the amount of money which is actually invested in the business.
There are other types of equity shares discussed below:
- Rights Share: These are the shares issued to the existing shareholders of a company. Such kind of shares is issued to protect the ownership rights of the investors.
- Bonus Share: These are the type of shares given by the company to its shareholders as a dividend. There are various advantages and disadvantages of bonus shares like dividend, capital gain, limited liability, high risk, fluctuation in the market, etc.
- Sweat Equity Share: These shares are issued to exceptional employees or directors of the company for their exceptional job in terms of providing know-how or intellectual property rights to the company.
- Par or Face Value: It is the value of a share of which it is accounted in books of accounts.
- Issue Price: It is the price at which the equity share is actually offered to the investor. Normally, the issue price and face value of a share are same in the case of new companies.
- Share Premium and Share at Discount: When a share is issued at a price higher than face value, the excess amount is called premium. Contrary to it, if the share is issued at a price lower than face value, it is said to be issued at a discount.
- Book Value: It is the ratio of the total of paid-up capital and reserves and surplus divided by total no. of shares. This is the balance sheet value of shares.
- Market Value: In the case of companies listed on stock exchanges, the market value of the share is the price at which they are sold currently sold in the market.
When talking about equity shares, there are two angles. One investor angle wherein the investor invests in equity shares and second financing angle where a company accepts the finance in the form of equity. There are pros and cons of both of these as described below.
Financing Angle: Benefits and Disadvantages of Equity Finance
Investor Angle: Benefits and Disadvantages of Equity Shares InvestmentLast updated on : August 31st, 2017