Equity Shares: Meaning, Features, Advantages and Disadvantages

Equity Shares are a very popular investment class in the country to grow capital, especially in the long term. Holders of equity shares are owners of the company. They can vote on decisions, receive dividend and influence the direction in which the company will go. Shares may be either listed, which are listed on a stock exchange, or unlisted.

What are equity shares?

Equity shares are units of ownership of a company. The company can be a private limited company or a public limited company. A share is issued to a party in exchange for capital or funds. There is no restriction on who can hold equity shares. An individual, an HUF, a company, a partnership, local and Central Governments, trusts, mutual funds can all hold equity shares subject to the rules. It is even possible to hold equity shares in companies incorporated in other countries.

Equity shareholders are owners of the company. The percentage of holding depends on the number of shares owned. As owners of the company, equity shareholders get dividend when the company distributes its profits. There are different types of equity shares i.e partly paid up equity shares, fully paid up equity shares, bonus shares, rights shares etc.

Features of equity shares:

Equity share capital is permanent capital. This capital is not returned to the shareholder unless the company is wound up. If the company is wound up, the last person to get paid is the equity shareholder.

Equity shareholders can vote at annual general meetings and extraordinary general meetings. Since they are owners of the company, each share comes with a voting right.

Equity shares generally can’t be traded unless they are listed on the stock exchange. If shares are listed on the stock exchange, then you can exit your investment at any time at market prices.

Equity shareholders are compensated by the company in the form of dividends which is a distribution of profits, bonus shares and rights shares.

Advantages of equity shares:

From the company perspective, there is no fixed outgo when it comes to dividends. The company can pay as much as it wants to the shareholder.

Equity share capital has no charge on the company’s assets. The capital only has to be paid back in case of liquidation.

From the investor’s perspective, the advantages of equity shares are that it is possible to be the owner at a comparatively lower price. As the company grows, the value of the shares increases and helps capital grow. In case of listed equity shares, it is possible to exit the investment at any time.

Disadvantages of equity shares:

From an investor’s perspective, for unlisted shares, there is no market. Until the time the company lists on a stock exchange, there is no way for you to exit the investment.

There are a lot of compliances that a company has to follow when it comes to considering individual shareholders and their rights.

Before you invest in equity shares, you need to understand the risks completely as well as formulate an exit plan. Exiting listed equity shares is very easy.

If you’re looking at investing in equity shares listed on the stock exchange, you will need to open a demat account and trading account with a reputed stockbroker like IndiaNivesh who can help you with the back end support to make your trades.

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Created on Mar 19th 2020 03:17. Viewed 352 times.

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