An equity share, commonly referred to as ordinary share also represents the form of fractional or part ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. The holders of such shares are members of the company and have voting rights.
Equity shares are the main source of finance of a firm. It is issued to the general public. Equity shareholders do not enjoy any preferential rights with regard to repayment of capital and dividend. They are entitled to residual income of the company, but they enjoy the right to control the affairs of the business and all the shareholders collectively are the owners of the company.
Features of Equity Shares
The main features of equity shares are:
1. They are permanent in nature.
2. Equity shareholders are the actual owners of the company and they bear the highest risk.
3. Equity shares are transferable, i.e. ownership of equity shares can be transferred with or without consideration to other person.
4. Dividend payable to equity shareholders is an appropriation of profit.
5. Equity shareholders do not get fixed rate of dividend.
6. Equity shareholders have the right to control the affairs of the company.
7. The liability of equity shareholders is limited to the extent of their investment.
Advantages of Equity Shares
Equity shares are amongst the most important sources of capital and have certain advantages which are mentioned below:
i. Advantages from the Shareholders’ Point of View
(a) Equity shares are very liquid and can be easily sold in the capital market.
(b) In case of high profit, they get dividend at higher rate.
(c) Equity shareholders have the right to control the management of the company.
(d) The equity shareholders get benefit in two ways, yearly dividend and appreciation in the value of their investment.
ii. Advantages from the Company’s Point of View:
(a) They are a permanent source of capital and as such; do not involve any repayment liability.
(b) They do not have any obligation regarding payment of dividend.
(c) Larger equity capital base increases the creditworthiness of the company among the creditors and investors.
