Every company needs finance to grow its business. There are a number of ways through which a company can collect funds. One such way is by issuing equity shares. A company can raise funds and finance its needs by issuing equity shares to the investors. The investors, on their part, have to pay the price of shares bought and get a part of ownership in the company. Equity shareholders also receive dividends when the company earns profits and enjoy voting rights as well. What are equity shares? Their features and advantages? We will learn all in this article.
What are Equity Shares?
Equity shares represent ownership rights in the company. As said, equity shares are issued for capital financing. Whenever a company needs capital, it can issue equity shares in the market for the investors. The company can use the proceeds earned from issuing equity shares for a variety of reasons such as financing any business operation, expanding business, clearing off debt, meeting general administrative costs, etc. The investors, on the other hand, can buy the issued shares at the market price and enjoy an ownership interest in the company. Whenever the company earns profits from its business ventures, it can disburse dividends to the equity shareholders. The shareholders also enjoy voting rights in the framing of any company policy, the election of directors, etc.
Features of Equity Shares
Now that you know what an equity share is, it is also important to learn its features that will help you distinguish equity shares from others of the same kind.
- By investing in equity shares, you get an ownership stake in the company. You will earn profits when the stock’s price increases. You also become eligible to receive dividends whenever the company earns profits.
- Besides receiving dividends, you also get voting rights as an equity shareholder. You can have your vote in the company’s policy makings, the election of directors, etc.
- Equity shares are non-redeemable, i.e; they do not come with a callback feature. This means the company can only buy back the equity shares when the shareholder agrees.
- Profit earned from the sale or transfer of equity shares are considered capital gains and are taxed accordingly. There are two types of capital gains- Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG). LTCG is tax-free up to Rs 1 lakh, and gains above Rs 1 lakh are taxed at 10%. On the other hand, STCG is taxed at 15%.
- Equity shares are traded on stock exchanges.
Advantages of Equity Shares
There are several advantages of issuing equity shares:
- Raising Capital: The first, foremost, and also primary advantage of issuing equity shares is to raise capital. Every company wants to grow bigger and for that, it needs finance. Equity shares serve as one the best sources of capital financing. Not only growth, but some companies may also require funds to meet general operating expenses, or say, to clear off any existing debt. The capital gathered from issuing equity shares can be used in any of these cases.
- Eliminates the Need for Debt Financing: The option to raise funds by issuing equity shares eliminates the need to take loans or credit. There are multiple reasons why issuing equity shares is better than debt financing. In the case of equity shares, it is the shareholders who have to bear the risk. Whereas, in the case of debt financing, the company has to keep on clearing the debt even if the business is not running well enough.
- To Get Listed on Stock Exchange: Companies can issue equity shares to the general public only after getting listed on a stock exchange. By listing itself on the stock market, the company gains visibility among the investors. This works as a sort of marketing strategy and allows companies to gain the trust of more investors in the following time.
An investor enjoys several advantages by owning equity shares of a company.
Equity shares allow investors to earn higher returns
- Ownership Right: Equity shareholders get ownership in the company. They can participate in major decision making and are also eligible to earn dividends when the company earns profits.
- Can Earn Higher Returns: When the company performs well, its stock price generally rises. This in turn increases the value of the investment of the shareholders in the company. The shareholder can then sell the owned shares and earn capital gains. Equity shares have high return potential.
- High Liquidity: One of the major advantages of investing in equity shares is that the investors enjoy a high level of liquidity. They can buy or sell the equity shares in the stock market anytime during trading hours. They do not have to go through any paperwork or formality in order to sell the equity shares.
- Portfolio Diversification: There are a number of companies listed on the stock exchange. This gives investors the opportunity to buy equity shares of different companies in order to diversify their equity investment portfolio. A diversified portfolio lessens the risks associated with equity investments.
So we have learned the meaning and features of equity shares in detail. We have also understood the advantages of equity share for both the company and the investors. Investment in equity shares does bring market risks but they offer the opportunity to earn substantial returns as well.