Equity share is a main source of finance for any company giving investors rights to vote, share profits and claim on assets. Various types of equity share capital are authorized, issued, subscribed, paid up, rights, bonus, sweat equity etc. The value of equity shares are expressed in terms of face value or par value, issue price, book value, market value, intrinsic value, stock market value etc.
In the world of finance and investment management, ‘equity share’ is a big word frequently used in every next discussion. We call it stock, ordinary share, or shares, all are one and the same. Explaining equity shares in a page or a bunch of pages is very difficult. Let us still try to define it in a summarized manner as possible.
Normally, a company is started with equity finance as its first source of capital from the owners or promoters of that company. After a certain level of growth, more capital is required for further growth. The company then finds an investor in the form of friends, relatives, venture capitalists, mutual funds, or any such small group of investors and issue fresh equity shares to these investors.
A point comes where the company reaches a very big level and requires huge capital investment for business growth. It then offers its equity share to the general public. This is called Initial Public Offer (IPO). More such issues in future are called Follow-on Public Offer (FPO).
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They are categorized under long-term sources of finance because legally they are irredeemable in nature. For an investor, these shares are a certificate of ownership in the company by virtue of which investors are entitled to share the net profits and have a residual claim over the assets of the company in the event of liquidation. Investors have voting rights in the company and their liability to the company is limited to the amount of issue price of the equity stock.
There are various types of equity shares classified based on various things.
In the financial statements of a company, equity shares are placed on the liability side of the balance sheet. They are classified into various categories which are as follows:
It is the maximum amount of capital which can be issued by a company. It can be increased from time to time. Some fee is required to be paid to legal bodies accompanied with some formalities.
It is that part of authorized capital which is offered to investors.
It is that part of Issued capital which is accepted and agreed by the investor.
Paid Up Capital
It is the part of the subscribed capital, the amount of which is paid by the investor. Normally, all companies accept complete money in one shot and therefore issued, subscribed and paid capital becomes one and the same. Conceptually, paid-up capital is the amount of money which is actually invested in the business.
There are other types of equity shares discussed below:
These are the shares issued to the existing shareholders of a company. Such kind of shares is issued to protect the ownership rights of the existing investors.
These are the type of shares given by the company to its shareholders as a dividend. There are various advantages and disadvantages of bonus shares like dividend, capital gain, limited liability, high risk, fluctuation in the market, etc.
Sweat equity shares are issued to exceptional employees or directors of the company for their exceptional job in terms of providing know-how or intellectual property rights to the company.
Par or Face Value
It is the value of a share of which it is accounted in books of accounts.
Issue Price
It is the price at which the equity share is actually offered to the investor. Normally, the issue price and face value of a share are same in the case of new companies.
When a share is issued at a price higher than face value, the excess amount is called premium. Contrary to it, if the share is issued at a price lower than face value, it is said to be issued at a discount.
Book Value
It is calculated by dividing total of paid-up capital and reserves and surplus net of any loss by total number of equity shares of the company. This is the balance sheet value of shares. This is an important value in case of Mergers and Acquisition.
Market Value
In the case of companies listed on stock exchanges, the market value of the share is the price at which they are sold currently sold in the market, it is also called stock market value. It may happen that stock market value and value as per fundamental principles differ because stock market value is affected by a number of sentiments.
Fundamental Value
Number of times fundamental value of security is calculated for the purpose of Merger or valuation. It is calculated as per (i) Dividend Discount Model (ii) Price Earning Ratio Method (iii) Earning Capitalization Method (iii) Chop Shop method.
When talking about equity shares, there are two angles. One investor angle wherein the investor invests in equity shares and second financing angle where a company accepts the finance in the form of equity. There are pros and cons of both of these as described below.
Financing Angle: Benefits and Disadvantages of Equity Finance
Investor Angle: Benefits and Disadvantages of Equity Shares Investment
Last updated on : October 1st, 2018** Disclaimer: This post may contain Affiliate Links marked as ** and we may earn a commission on sale.
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