What do you Mean by Equity Shares?

Definition of Equity Share

An equity share is defined as the normal shares which a person buys with the concern of gains on it with maximum liabilities across it. These types of shareholders have the right to vote. 

Specification of Equity Share Capital

• The company is held with the equity shares and it is given back only when the company gets closed.
• The equity shareholder has the right to vote for managing the company.
• According to the buying of abundance capital, the rate of equity capital depends, but there is no rate fixed for dividend on any equity capital. 

Classification of Equity Share

• Authorized share capital- the highest amount which the company can issue however the amount can be altered with time by the companies under some formalities.

• Issued share capital- It is said to be approved capital which companies provide to the investees.

• Subscribed share capital- The investors who accept the division of issued capital.

• Paid-up capital- it is the capital is where the investor originally invests in the company. It is the part of subscribed capital given by the investors.

• Right share- these are types of shares which the organization gives to their existing shareholders. This is to be done so to preserve the right of the existing investors. 

• Bonus shares- the dividend given from the split stocks done by the company to its shareholders is bonus shares.

• Sweet equity share- these shares are to be issued to only those people who are the employees and have performed on tremendous benchmark for the organization. 

Read Also:- RTA Differences Between Equity Shares and Preference Shares

Advantage of Equity Share capital

In ES one does not have to pay the dividend.

One does not have to pay the extra charge on the circulation of shares on the assets of the employee.

Disadvantages of Equity Share capital

If only ES is issued then the organization cannot take credit or the advantage of trading on equity. 

There is risk concerned with the profits on the shares whether the company gains or losses.

Difference between Equity Shares and Preference Shares

ES is an ordinary one whereas the Preference Share requires the distribution of dividend. The equity shareholders have the right to vote in the majority business conclusion. 

Parameters	Preference share	Equity share
Dividend rate	Has a fixed rate	Varies
Vote right	No voting rights	Right to vote
Participation in management	Not allowed	Is permitted
preferences	Get the 1st preferences before equity share	Gets 2nd preferences after the preference share

Read Also:- RTA Comprehensive Write up on Sweat Equity, Transfer And Transmission of Shares

What is the key role of Financial Management?

To raise the money of shareholders by maximizing the present market value of the equity share. 

1. Optimise the shareholder’s money 

To optimise the present market value of the equity shares which is possible when there is maximum fund use to make the organization achieve its objectives.

2. Procurement of sufficient funds at the lowest possible costs

Funds must be procured at the lowest cost.

3. Effective utilization of funds

The returns will be needed to be more than the invested money

4. Ensure about safe investment 

A proper financial decision makes safer investments.

The companies need to develop the reserves and maintain them.

5. Effective capital structure 

Both debt and equity need to be maintained to have a fair composition of capital.

Elaborate on the concept of capital structure 

It is the mixture of the borrowed funds and the owner’s funds. 

As debt increases the risk gets increased but it has the chances to get profit due to its lower cost. Thus more debt must be introduced with risks in mind.

Capital structure = Debt + Equity = Total Capital

Read Also:- Top 14 Differences Between Equity Shares and Preference Shares

What Are the Factors Affecting the Capital Structure?

1. Position of cash flow

An organization needs to know its returns before borrowing debt.

Enough cash must be there for the payment of fixed liabilities and operating expenses. 

2. Return on investment

High ROI 

• ROI is more than the rate of interest
• Also, known as trading on equity
• It maximises earning per share
• It is good to raise the money for the business. 

Low ROI

• ROI is lower than the rate of interest 
• The organization is unable to generate good profits.

3. Debt cost

The ROI paid on the debenture, loans and borrowed funds are the cost of debt.

4. Equity cost

If the debt used is more than limit then the cost of equity increases and EPS gets declined. 

5. Cost of floating

The fundraising cost is called the flotation cost. 

6. Risk consideration

Firm bears two types of business risk:

                            (i) Financial risk: Risk of compensation for debt.

                            (ii) Operating risk: Risk of improving operating expenses.

                    If the Firm’s business risk is lesser than, its capacity to use debt is higher.

7. Stock market 

Bullish phase

Buying equity shares is easier as it could be sold at higher prices 

Bearish phase

Debt is an effective option for raising the funds in the stock market. 

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