Equity Shares: Features, Advantages and Types of Equity Shares
In the world of finance and investment, we often use the word ‘equity shares’. In fact, it is a part of everyday discussion among investors, stock market analysts, newspapers, business magazines, etc. Whether you term it shares, stocks or ordinary shares, they are all one and the same.
For companies, equity shares are the biggest source of finance which helps them expand and grow. The concept of equity shares is wide and there are many types of it. To begin with, let us understand the meaning of equity shares.
Equity Shares Meaning
Equity shares are the shares that the companies issue to the public for long term financing. Legally the equity shares are not redeemable in nature and that is why they are referred to as long term source of finance for a company. The investors of the equity shares have the right to vote, share the profits and claim the assets of the company. The value of equity shares is expressed in the various term like par value or face value, book value, issue price, market price, intrinsic value and so on.
Let us now learn about the features of equity shares.
Features of Equity Shares
• Equity shareholders have the right to vote on various matters of the company.
• The management of the company is elected by equity shareholders.
• The equity share capital is held permanently by the company and returned only upon winding up.
• Equity shares give the right to the holders to claim dividend on the surplus profits of the company. The rate of dividend on the equity capital is determined by the management of the company.
• Equity shares are transferable in nature. They can be transferred from one person to another with or without consideration.
The above mentioned are few of the features of equity shares. Let us now learn about the advantages of equity shares.
Advantages of Equity Shares
From the Shareholder’s Point of View:
• Equity shares are liquid in nature and can be sold easily in the capital market.
• The dividend rate is higher for the equity shareholders when the company earns high profits.
• The equity shareholders have the right to control the company’s management.
• The equity shareholders not only get the benefit of dividend but they also get the benefit of price appreciation in the value of their investment.
From the Company’s Point of View:
• Equity shares are the permanent source of capital for a company.
• There is no requirement of creating a charge over the assets of the company when equity shares are issued.
• The liability of the equity shares is not required to be paid.
• The company does not have any obligation to pay dividend to the shareholders.
• The credit worthiness of the company increases among the investors and creditors when the company has a larger equity capital base.
The above mentioned are the advantages of equity shares to both the shareholders and the company. Let us now learn about the types of equity shares.
Types of Equity Shares
Anyone who makes an investment in equity shares or monitors the functioning of the company must know about the various types of equity shares. The equity shares are presented in the liability side of the balance sheet and they are classified in the following types.
• Authorised Share Capital
As the name suggests, authorised capital is the maximum amount of capital that a company can issue. The authorised limit can be increased after seeking permission from the respective authorities and paying fees.
• Issued Share Capital
Out of the authorised share capital, the capital which the company offers to the investors is termed as issued share capital.
• Subscribed Share Capital
Subscribed capital is a part of the issued share capital that investors agree and accept.
• Paid Up Capital
Paid up capital is a part of the subscribed capital for which the investors pay. In general, the companies issue the shares to the investors after collecting all the money in one go. Therefore, it is not wrong to say that subscribed and paid-up capital is the same thing where the company collects all the money and issues shares. However, conceptually the paid-up capital is the amount of capital that the company invests in the business.
• Right Shares
When you make an investment in equity shares and the company issues further shares to you, it is termed as the right shares. The right shares are issued to protect the ownership of the existing investors.
• Bonus Shares
Bonus shares are issued by the company to its investors in the form of a dividend.
• Sweat Equity Shares
When the employees or directors perform their job well in terms of providing know-how or intellectual property rights to the company, the company issues sweat equity shares to them as a reward.
The above mentioned are the different classes of equity shares. Now let us learn about the various types of equity share prices.
Various Prices of Equity Shares
• Par or Face Value
Par or face value represents the value of shares recorded in the books of accounts.
• Issue Price
The price at which the shares of the company are offered to the investors is called the issue price. In most of the new companies, the face value and the issue price of a share is the same.
• Share at Discount and Share Security Premium
When the company issues its shares at a price which is lower than its face value, the deficit amount is termed as a discount. On the other hand, when the company issues its shares at a price which is higher than its face value, the excess amount is termed as premium.
• Book Value
Book value is the balance sheet value of shares. The formula to calculate the book value is as follows;
Paid Up Capital + Reserves and Surplus – Any Loss / Total Number of Equity Shares of the Company
• Market Value
When the company is listed on the stock exchange, the price at which the shares of the company are traded is termed as the market value of the shares. The stock market value would differ with the fundamental value of shares because in both the cases different sentiments affect the stock value.
• Fundamental Value
Fundamental value or intrinsic value of the shares is determined on the basis of the fundamentals of the company. This value is mostly required during mergers and acquisitions.
The above mentioned are the different types of prices of equity shares. When you make an investment in equity shares, you purchase the shares from the stock market at market value. If you are looking to make an investment in equity shares, you may seek help from a well-established broker like IndiaNivesh Ltd. who can help you make an investment in shares at the right valuations.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
PREVIOUS STORY
ULIP vs Mutual Funds – Which Investment gives you better returns?
With increasing disposable income at hand and awareness of financial planning, more and more people are considering to invest their savings for a better and secured future. This has given rise to numerous financial products in the market. Today you will find a variety of financial instruments available in the market which offer promising returns. Selecting one or few options out of them can be a daunting task. Moreover, making the right choice of financial instrument is also important because you are putting in your hard earned income in these investment avenues and want your money to grow over time. To assist you with money investment tips, we have brought to you two of the popular investment products that have given good return to the investors over a span of time. They are Unit Linked Insurance Plans and Mutual Funds. In this article, you will understand the basic concepts of ULIP and mutual funds, ULIP plans vs. mutual funds, and much more.Let us begin by first understanding what is ULIP? What Is ULIP?Unit Linked Insurance Plan is a financial product that offers insurance policy along with investment in different investment avenues. The companies that provide ULIPs bifurcate your money into two parts. Some amount of money is used to provide you with the insurance policy and the remaining amount of money acts as an investment. As an investor, you can generate returns with the money invested by the company. The money is invested in debt instruments, equities, bonds, etc. The meaning of ULIP must have clarified every individual’s doubt about why should I invest in ULIP. Let us now understand what are mutual funds?What are Mutual Funds?Mutual Funds are the most popular investment option among investors. The mutual fund companies collect money from different investors and pool them to invest in various investment classes such as stocks, bonds, money market instruments and other assets. The mutual funds hire dedicated fund managers who look after all the investment decisions on your behalf. Thus, a mutual fund gives you access to a professionally managed portfolio making it an ideal choice for investors who do not know much about investing. All you need to do is, choose a mutual fund scheme depending on your financial goals and rest will be taken care of by the fund house. The mutual fund company structures and maintains your portfolio in a way to match your investment objectives. After understanding the meaning of both investment options, let us now learn about the difference between ULIP and mutual fund.Difference between ULIP and Mutual Fund / ULIP vs. mutual fund• When you buy a mutual fund, the motive is solely investment. On the contrary, when you buy ULIP, it gives you insurance cover and also acts as an investment.• When you wonder why should I invest in ULIP, the answer is simple – In case of ULIP, you are eligible for a deduction from your taxable income as per section 80C of the Income Tax Act. Whereas, in case of mutual funds only Equity Linked Saving Schemes (ELSS) are eligible for tax deductions.• Most mutual funds are liquid in nature. They can be withdrawn within a year. However, 1% of the fund value is deducted as exit load. On the other hand, ULIP is not so liquid in nature. Their liquidity is restricted due to a minimum lock-in period of 5 years.• The returns in mutual fund vary depending upon the performance of the stock market and risk factor. The mutual funds which have higher exposure to equity can generate higher returns because of the higher risk. Mutual funds with exposure to debt market give slightly lower returns. On the other hand, the returns from ULIPs are lower in comparison to mutual funds. This is because ULIPs provide insurance cover along with an investment avenue.• ULIPs offer insurance plans that cover the life of the policyholder and in case of an unfortunate event, it gives the assured sum of money to the policyholder’s family. But in the case of a mutual fund, there is no such insurance cover.• When a comparison is made between ULIP plans vs. mutual funds, it is important to consider the expenses. The expenses in ULIPs are higher in comparison to mutual funds. This is because, in the case of mutual funds, SEBI has capped the total expense ratio to 2.25% . No such limit exists for ULIPs.The above mentioned points suggest ULIP vs. mutual fund differences. Investors often have a question in mind i.e. why should I invest in ULIP or mutual fund. Well, to solve this doubt, we list down certain points that will help investors in taking the right investment decision.When You Can Invest In Mutual Funds• When the time horizon is short term or medium term.• When you want to invest in a highly liquid asset.• When you have a good risk appetite.• When you already have an insurance policy in place.When You Can Invest In ULIPs• When your investment horizon is for the long term.• When your risk appetite is low.• When your aim is to save a good amount of tax.• When you want insurance policy along with the investment. Therefore, before taking any investment decision about ULIP vs. mutual fund, you must consider the above mentioned points. You can even purchase these plans from a reputed broker like IndiaNivesh Ltd. They can further assist you in the money investment tips and can guide you on various investment options available to you. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
NEXT STORY
What is SIP & How does SIP Investment Work in India?
What is SIP?Systematic Investment Plan (SIP) is a simple and convenient method for investing in mutual funds. It provides a way of investing a fixed amount of money in any particular scheme of mutual fund at a pre-defined regular interval of time. If you still wonder what is SIP or what is sip in mutual fund; it can be simply explained as a planned tool for investment in which a particular amount is deducted from the account of the investor and is invested in the mutual fund scheme chosen by the investor. The time interval at which the money is being invested in the mutual funds can be daily, monthly, quarterly or half-yearly.Among the mutual fund investors, SIP has become very popular gradually because of the investing discipline it instills in an investor. Moreover, you do not need to worry about the volatility in the market and the timing the market when you are investing through SIP mode. You can make an easy entry into the investment market by starting a SIP. It is always advisable to start your SIP investment at an early age to reap the benefit of power of compounding. Perks of SIPNow that you know what is SIP or what is SIP in mutual fund, let us have a look at the few perks of an SIP investment. Rupee Cost Averaging This is one of the best features of SIP investment. SIP is a “way” of investing in a mutual fund in a disciplined manner such that irrespective of the market situation, one keeps investing a particular amount of money at a predefined date. So, if the market is high, you would get lesser number of units and vice versa. In this way, you eliminate the concept of timing the market and keep investing irrespective of the market situation. Thus, the average cost of investing becomes lower than bulk investing at any point in time, because you invest when the market is high as well as low and thus the average cost of units gets spread over time. This helps in smoothening out the short-term fluctuations in the market for the portfolio. Power of compounding If you continue your SIP investment for a longer period, you will start earning returns on the returns of your investments. This can help you accumulate a healthy corpus over the long term Time- saving investment option SIP investment is a time- saving option and if you are choosing to carry out all the procedure online, it is even more time saving and convenient. Stress- free Since the market fluctuations do not hamper SIP investment it is a stress- free option for the investors. Flexible and affordable SIP is a flexible and affordable investment option as the minimum amount to start a SIP is Rs.500 and you can go on increasing your investment as your income increases with time. Also, there are no charges for starting or stopping a SIP investment. Now since we have discussed in length about what is sip investment, let’s take a real-life example to see how SIP can be used to achieve different financial goals: Rohit, a 33-year-old software engineer by profession who lives with his wife and a son. The two most important goals for Rohit are: to save for his son’s higher education and retirement. Rohit has been investing in conventional products like Bank Fixed Deposits in order to achieve these financial goals. But somehow, Rohit realized that his earnings from the FDs may not be enough for him to achieve his financial goals. The major cause of this shortfall is inflation. The real return he gets on his investments after deducting the inflation rate is very low. So, what should be Rohit’s approach in order to get high returns but without being affected by the fluctuations in the market? One of the good options here is to invest in an equity mutual fund through a SIP. This will help him in achieving his long-term financial goals and will also induce financial discipline into his life. Now, let us have a look at how does mutual fund SIP work and how does SIP work in India. How does SIP work? As said earlier, SIP functions on the principle of regular investments. Now the question arises how does SIP work in India? By starting a SIP, you are investing a defined quantity of money into mutual funds at pre-defined intervals. Your savings account will be debited with that particular amount of money for your SIP on your instruction. After the payment of the SIP is done, the AMC, Asset Management Company or the Mutual Fund house shall assign you with a particular number of units from the selected mutual fund scheme of yours. This assignment of units depends on the NAV or the Net Asset Value for that particular day of the scheme which you have chosen. As you go on paying the installment amount for SIP, you go on adding more units of your scheme. When the market fluctuates, i.e. when the market is up you get less units for your money paid for SIP whereas more amounts of units can be purchased when the market is down. A major feature of SIP is rupee cost averaging. With help of a SIP, you can lower down your investment’s average cost and risk reduction for your investment can be possible by wisely spreading the price of your purchase over time. How to start SIP investment? We have answered what is SIP and what is SIP investment. But, before you actually start investing in SIP, you need to ascertain important things like your financial goals, tenure of your investment, your risk appetite, etc. First, you have to decide about your long-term financial goals. The next important step is to decide on the timeline i.e. by when you would need money to achieve these goals. This timeline once decided will be the tenure for which you will be investing in a SIP. Then, the next vital step is to decide on the amount of money to be invested. You can use a SIP calculator available online to find out the amount of money you need to invest regularly to achieve your goals. Finally, when the amount and tenure are all decided, you can go ahead and consult financial experts to know about the various mutual fund schemes available and choose an appropriate one for you. In the next step, you need to submit your KYC. If the online method of submission is being selected then you can submit the details digitally as well. Mandatory documents like PAN card, address proof, and an identity proof need to be submitted along with the KYC (Know your Client) form. Post this, you will have to complete the IPV procedure i.e. In-person verification. You can again do this in two ways i.e. by visiting the office and submitting the necessary documents or by attending a video conference call using a webcam. This is a part of the KYC process for authentication. Once your KYC is complete, you need to submit the mutual fund application form along with the cheque of your investment amount and the SIP form at the nearest office of a mutual fund house, distributor or an agent. Moreover, you can start your own SIP online as well. You can get details on all plans and schemes on websites like IndiaNivesh and you can easily start the SIP online, provided your KYC is already done. Else, it needs to be completed first, before starting to invest. SIP is a great and extremely convenient way to start investments in mutual funds. Once you completely understand the basics, you can easily realize your different financial goals with help of SIPs. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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