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 expression of the value of equity shares are 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 and we frequently use it 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, there is a requirement for more capital 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. Initial Public Offer (IPO) is the offer of shares which the company makes to the general public for the first time. And Follow on Public Offer (FPO) are more such offers in future to the public.
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They fall under long-term sources of finance- category 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 limits to the amount of issue price of the equity stock.
There are various class of shares (equity) dependent on various things. Let’s discuss them.
In the financial statements of a company, we place the equity shares on the liability side of the balance sheet. Their classification into various categories is as follows:
It is the maximum amount of capital which a company can issue. The companies can increase it from time to time. For that we need to comply with some formalities also have to pay some fees to the legal bodies.
It is that part of authorized capital which the company offers to the investors.
It is that part of issued capital which an investor accepts and agrees upon.
Paid Up Capital
It is the part of the subscribed capital, which the investors pay. 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 a company actually invests in the business.
Apart from the above, there are other types of shares (equity) also.
These shares are those which a company issues to it’s existing shareholders. The company issues such kind of shares in order to protect the ownership rights of the existing investors.
When the company issues shares to its shareholders in the form of a dividend, we shall call them bonus shares. 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
Par or face value is the value of shares which we record in the books of accounts.
Issue Price
This price is the price which a company actually offers to the investors. Normally, the issue price and face value of a share are the same in the case of new companies.
When issuance of shares is at a price higher than face value, we shall call this excess amount to be premium. Contrary to it, when the issuance of shares is at a price lower than face value, we shall call this deficit amount to be discount.
Book Value
The calculation of the book value will be:
Paid up Capital + Reserves and Surplus – Any Loss / The total number of equity shares of the company
This is the balance sheet value of shares. This is an important value in the 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 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 there are a number of sentiments that affect the stock market value.
Fundamental Value
The number of times the fundamental value of the security is calculated for the purpose of the Merger or valuation. Its calculation is 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 : December 22nd, 2018
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Nice Article. Here is some information about Stockholder’s equity.
A good and clear information on equity share. MANY THANKS