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.
Equity share is looked at from different perspectives by different stakeholders. Broadly, there are two major angles of looking at it – 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 Investmetn in Equity Share Capital
An investor is entitled to receive a dividend from the company. It is one of the two main sources of return on his investment.
The other source of return on investment apart from dividend is the capital gains. Gains which arise due to rise in market price of the share.
Liability of 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 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 incomes of the company. He will receive some part of that income in cash in the form of dividend and remaining capital is reinvested in the company.
Whenever companies require further capital for expansion etc, 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 current market price of the equity share. So, existing investor can take that advantage or otherwise can renounce right in some one’s favor to get value of right.
At times, companies decide to issue bonus shares to its shareholders. It is also a type of dividend. Bonus shares are free shares given to existing shareholders and many times they are given in lieu 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 be benefited by this? By splitting of share, the per-share price reduces in the market which eventually increases the readability of share. At the end, stock split results in higher volumes with a number of investors leading to high liquidity of the share.
The dividend which a shareholder receives is neither fixed nor controllable by 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, unless Board of Directors propose dividend, investors will not receive dividend.
Equity share investment is a risky investment as compared to any other investment like debts etc. The money is invested based on the faith an investor has in the company. There is no collateral security attached with 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 which is available to equity shareholders is after the payment of all other stakeholders’ viz. debenture holders etc.