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Define equity shares used in financial management.
Equity shareholders are real owners of the company and have control over the management. Liabilities of the equity shareholders is the value of unpaid value of shares. They can’t be redeemed during the life time of the company.
Features of equity shares
Following are the features of equity shares −
Maturity of the shares − There is no maturity period for equity shares.
Residual claim on income − They get their income left after paying dividend to preference shares. Their earnings equal to profit after tax minus preference dividend.
Residual claims on assets − They have right to claim right to get claims on assets.
Right to control − They have right to control management of a company and to take decision regarding operations.
Voting rights − They have right to vote to change any decision or remove any business decision. They can nominate proxy to participate and vote in the meeting instead of the shareholders.
Pre-emptive rights − Existing shareholders have legal rights.
Limited liability − They have only limited liability to the value of shares they have purchased.
Given below are the advantages of equity shares −
- Permanent sources of finance.
- Voting rights.
- No fixed dividends.
- Less cost of capital.
- Retained earnings.
The disadvantages of equity shares are mentioned below −
Irredeemable − Equity shares can’t be redeemed and it is most dangerous things of over capitalisation.
Obstacles in management − Since, every equity shareholders have power to take decisions, they can create obstacles in management decisions.
Leads to speculation − Sometimes equity shares dealing in share market lead to secularism.
Limited income to investors − If the investors want to invest in safe securities, they have no attraction for equity shares.
No trading on equity − Company can’t take advantage of trading on equity, if they want to raise their capital only through equity.
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