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.