What is equity shares, types, advantage and disadvantage?
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Equity shares were earlier known as ordinary shares. The holders of these shares are the real owners of the company. They have a voting right in the meetings of holders of the company. They have a control over the working of the company. Equity shareholders are paid dividend after paying it to the preference shareholders.
The rate of dividend on these shares depends upon the profits of the company. They may be paid a higher rate of dividend or they may not get anything. These shareholders take more risk as compared to preference shareholders.
Equity capital is paid after meeting all other claims including that of preference shareholders. They take risk both regarding dividend and return of capital. Equity share capital cannot be redeemed during the life time of the company.
Features of Equity shares:
Equity shares have the following features:
(i) Equity share capital remains permanently with the company. It is returned only when the company is wound up.
(ii) Equity shareholders have voting rights and elect the management of the company.
(iii) The rate of dividend on equity capital depends upon the availability of surplus funds. There is no fixed rate of dividend on equity capital.
Advantages of Equity Shares:
1. Equity shares do not create any obligation to pay a fixed rate of dividend.
2. Equity shares can be issued without creating any charge over the assets of the company.
3. It is a permanent source of capital and the company has to repay it except under liquidation.
4. Equity shareholders are the real owners of the company who have the voting rights.
5. In case of profits, equity shareholders are the real gainers by way of increased dividends and appreciation in the value of shares.
Disadvantages of Equity Shares:
1. If only equity shares are issued, the company cannot take the advantage of trading on equity.
2. As equity capital cannot be redeemed, there is a danger of over capitalisation.
3. Equity shareholders can put obstacles for management by manipulation and organising themselves.
4. During prosperous periods higher dividends have to be paid leading to increase in the value of shares in the market and it leads to speculation.
5. Investors who desire to invest in safe securities with a fixed income have no attraction for such shares.
Deferred Shares:
These shares were earlier issued to Promoters or Founders for services rendered to the company. These shares were known as Founders Shares because they were normally issued to founders. These shares rank last so far as payment of dividend and return of capital is concerned. Preference shares and equity shares have priority as to payment of dividend.
These shares were generally of a small denomination and the management of the company remained in their hands by virtue of their voting rights. These shareholders tried to manage the company with efficiency and economy because they got dividend only at last. Now, of course, they cannot be issued and they are only of historical importance. According to Companies Act 1956, no public limited company or which is a subsidiary of a public company can issue deferred shares.
The rate of dividend on these shares depends upon the profits of the company. They may be paid a higher rate of dividend or they may not get anything. These shareholders take more risk as compared to preference shareholders.
Equity capital is paid after meeting all other claims including that of preference shareholders. They take risk both regarding dividend and return of capital. Equity share capital cannot be redeemed during the life time of the company.
Features of Equity shares:
Equity shares have the following features:
(i) Equity share capital remains permanently with the company. It is returned only when the company is wound up.
(ii) Equity shareholders have voting rights and elect the management of the company.
(iii) The rate of dividend on equity capital depends upon the availability of surplus funds. There is no fixed rate of dividend on equity capital.
Advantages of Equity Shares:
1. Equity shares do not create any obligation to pay a fixed rate of dividend.
2. Equity shares can be issued without creating any charge over the assets of the company.
3. It is a permanent source of capital and the company has to repay it except under liquidation.
4. Equity shareholders are the real owners of the company who have the voting rights.
5. In case of profits, equity shareholders are the real gainers by way of increased dividends and appreciation in the value of shares.
Disadvantages of Equity Shares:
1. If only equity shares are issued, the company cannot take the advantage of trading on equity.
2. As equity capital cannot be redeemed, there is a danger of over capitalisation.
3. Equity shareholders can put obstacles for management by manipulation and organising themselves.
4. During prosperous periods higher dividends have to be paid leading to increase in the value of shares in the market and it leads to speculation.
5. Investors who desire to invest in safe securities with a fixed income have no attraction for such shares.
Deferred Shares:
These shares were earlier issued to Promoters or Founders for services rendered to the company. These shares were known as Founders Shares because they were normally issued to founders. These shares rank last so far as payment of dividend and return of capital is concerned. Preference shares and equity shares have priority as to payment of dividend.
These shares were generally of a small denomination and the management of the company remained in their hands by virtue of their voting rights. These shareholders tried to manage the company with efficiency and economy because they got dividend only at last. Now, of course, they cannot be issued and they are only of historical importance. According to Companies Act 1956, no public limited company or which is a subsidiary of a public company can issue deferred shares.
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