Benefits of equity share investment are dividend entitlement, capital gains, limited liability, control, claim over income and assets, right shares, bonus shares, liquidity, etc. Disadvantages are dividend uncertainty, high risk, fluctuation in market price, limited control, residual claim, etc. Let us see more in-depth the advantages and disadvantages of equity share investment.
Equity share is looked at from different perspectives by different stakeholders. There are two major angles of looking at it – the Company and Investor Angle. So, any statement about equity capital would have a different meaning for a company and an investor. We will look at the investor angle of equity share investment.
Advantages and Disadvantages of Investment in Equity Share Capital
An investor is entitled to receive a dividend from the company. It is one of the two primary sources of return on his investment.
The other source of return on investment apart from dividends is capital gains. Gains arise due to a rise in the market price of the share.
The liability of a shareholder or investor is limited to the extent of the investment made. If the company goes into losses, the share of loss over and above the capital investment would not be borne by the investor.
By investing in the company, the shareholder gets ownership in the company, and thereby he can exercise control. In official terms, he gets voting rights in the company.
Claim over Assets and Income
An investor of an equity share is the owner of the company, and so is the owner of the assets of that company. He enjoys a share of the income of the company. He will receive some part of that income in cash in dividends, and the remaining capital is reinvested in the company.
Whenever companies require additional capital for expansion, they tend to issue ‘rights shares.’ By issuing such shares, ownership and control of existing shareholders are preserved, and the investor receives investment priority over other general investors. Right Shares are issued at a price lower than the current market price of the equity share. So, an existing investor can take that advantage or renounce right in someone’s favor to get the value of right.
At times, companies decide to issue bonus shares to their shareholders. It is also a type of dividend. Bonus shares are free shares given to existing shareholders, and they are often given in place of dividends.
The shares of the company which is listed on stock exchanges have the benefit of any time liquidity. The shares can very easily transfer ownership.
Stock split means splitting a share into parts. How should an investor benefit from this? By splitting shares, the per-share price reduces in the market, which eventually increases share readability. At the end, a stock split results in higher volumes with several investors leading to the high liquidity of the share.
The dividend which a shareholder receives is neither fixed nor controllable by the investor. The management of the company decides how much dividend should be given. If there is a loss, there is no question of dividend. If there is a profit, investors will not receive the dividend unless the Board of Directors proposes a dividend.
Equity share investment is a risky investment compared to any other investment like debts etc. The money is invested based on an investor’s faith in the company. There is no collateral security attached to it.
Fluctuation in Market Price
The market price of any equity share has a wide variation. It is always very difficult to book profits from the market. On the contrary, there are equal chances of losses.
An equity investor is a small investor in the company, therefore, it is hardly possible to impact the decision of the company using the voting rights.
An equity shareholder has a residual claim over both the assets and the income. Income that is available to equity shareholders is after the payment of all other stakeholders’ viz., debenture holders, etc.
Also read Benefits and Disadvantages of Equity Finance from financing angle.