Have you ever heard of a company that does not need a smooth flow of working capital? It is the last thing that you need to keep a business running smoothly. Working capital is particularly helpful at times when a company faces financial challenges or finds it hard to maintain its regular operations. Often, these companies utilise the equity shares to raise the capital needed.
Many new investors wonder, “What is equity share capital?” To thoroughly understand the term, you need to familiarise yourself with the actual meaning of equity share. Ordinary or equity shares stand for the stake of ownership in any company. The shares a company sells serve as its source of investment.
Also, when you hold equity shares, you have fractional ownership of the company.
When a company raises its capital by offering its shares, this is called share capital or equity share capital. It is this amount that company owners utilise and expand their business ventures.
You may also like: Futures vs. Options: Differences every investor must know!
Why does a company issue equity shares?
There are multiple reasons for a company to invite general investors to invest in their company and earn fractional ownership. The prime reason could be for previously existing owners wishing to exit partially or completely. This is known as ‘Offer for Sale’ (OFS), and when new shares are created for distribution, it is known as Initial Public Offering (IPO).
IPO is launched in order to acquire more capital that can be used to expand the business further or use it as part of working capital. Sometimes, companies also issue shares in order to reduce the loan burden on their financial books.
General corporate purposes also feature among the reasons to raise capital. These include but are not limited to mergers, acquisitions, and brand building.
When investors acquire a share of a company, they also enjoy the chance to have a share of its profits and get to stake in the equity. With such ownership, you can earn returns as a shareholder, which come as dividends.
What are the different forms of equity share capital?
There are different types of equity shares for capital investment. As an investor, you can choose any of them before putting your money. Here’s a briefing on them:
- Ordinary Shares: This standard form of share stands for a company’s generic version of ownership. The company that you choose would not only grant all its shareholders the right to hold but would also pay them dividends. Moreover, they would entitle them to have their share in the profits.
- Authorised Share Capital: It is the ceiling limit of capital that any given company can issue. The upper limit of authorised share capital increases only after the respective authorities permit it.
- Issued Share Capital: This is the amount of capital that a company offers out of its authorised capital to its investors.
- Subscribed Share Capital: As a part of issued capital, it refers to the amount that investors agree and accept.
- Paid-Up Capital: This is the amount that a registered company invest in their businesses. It is part of subscribed capital, where investors need to pay to the enterprise.
- Right Shares: Existing owners issue such shares to shield the ownership of the enterprises. If an investor invests in a company’s equity share, then that company would further issue new shares to you. Right shares are those newly issued shares are Right shares.
- Bonus Shares: The dividend that the companies pay to the investors often come in the shape of bonus shares.
- Sweat Equity Shares: The employees of the directors of companies receive this type of share when they perform well.
- Subscribed Equity Shares: This refers to the shares that the company applies for and allots to only those investors who subscribe to them. In this way, the concerned company receives some subscription money.
Apart from this, you should know that companies often present new shares to general investors through IPO or Initial Public Offering. They make it via the process of book building.
Also Read: Understanding the difference between equity and debt IPO for the right investment
What could be the advantages of equity share capital?
- Enjoy creditworthiness: After contributing your bit to increase the share capital of a company, your shares would double up as collateral. Thus, whenever you need any loan, you can keep them as collateral. As your shares evidence the creditworthiness of the company you are investing in, your loan approval becomes less complicated.
- High Liquidity: It is a significant factor to consider before investing in any trading. Your liquidity shows how effortlessly you can change your investment into physical cash.
Equity share capitals are one of the most liquid assets that you can find in the market. And you can sell them easily when you need them. So, if there is an emergency, you can simply liquidate the investment for some ready cash. - Stock Split: This simply means that you can split your equity shares into small parts, thus reducing their price. As an investor, this can be beneficial. The reduction of price increases the liquidity of your shares. Also, a large volume of shares would also increase its price if the company performs well.
- Better Income: The goal of any kind of investment is income. And investment in the equity shares of a well-performing company is one of the most potent ways for a high-income generation. Plus, you also get the opportunity to have a steady flow of dividends.
Is there any risk while generating equity share capital?
No trading or financial instruments are completely immune from risks. Even in the equity share capital world, there are certain aspects to consider. For example:
- If the shares that a company issues do not go with the requirements, or at least the expectations of an investor, then the latter would not show interest in them. And when fewer purchasers are in the stock market, the company falters to generate sufficient share capital for equity.
- There are times when many companies need more capital, even when many shareholders are in the concerned enterprise.
There are a number of share options for equity available for investors in the stock market. However, the availability of too many options for investment often confuses a new investor. And in many cases, the issued share ends up being ineffective in generating satisfactory share capital.
- Sometimes, companies reduce the face value of their shares to attract a large number of shareholders. Having a big base of investors can be an effective strategy only when the number of investors stays within a definite, manageable number.
If the company fails to do so, it can add to the liability on the company’s part. This is because the companies would need to pay a hefty amount for dividends.
Eventually, it can negatively impact the company’s actual reason for increasing share capital. Later, this can be a threat to sustaining the health of the concerned company. - It is more than necessary to thoroughly monitor the growth of the various equity share capitals that they are investing in.
Also Read: Do all technical analysis tools work equally well?
Final Thoughts
You now have a brief idea of the upsides and downsides of investing in equity share capital. And now you are aware of the types, the features and the benefits of equity share. However, since you need more than preliminary knowledge of various investment options, make sure to partner with a reliable booking agency to get all the practical help that you need.
