Shares and Equity Shares

Every business needs some capital to start up. When a new business is started, the personal savings of an entrepreneur along with contributions from friends and relatives are the source of fund. The entrepreneur in this case can also be called a promoter. This may not be feasible in case of large projects as the required contribution from the entrepreneur (promoter) would be very large even after availing term loan; the promoter may not be able to bring his / her share (equity capital).Thus availability of capital can be a major constraint in setting up or expanding business on a large scale, because of this limited pool of savings of small circle of friends and relatives.
However, instead of depending upon this small pool, the promoter has the option of raising money from the public across the country by selling (issuing) shares of the company. For this purpose, the promoter can invite investment to his or her venture by issuing offer document which gives full details about track record, the company, the nature of the project, the business model, the expected profitability etc. If an investor is comfortable with this proposed venture, he / she may invest and thus become a shareholder of the company. Thus, a share is the share in the capital of the company and it denotes part of the ownership of a company.
A person or company holding shares in a company is an owner of the company to the extent of his / her shareholding. The values of these shares are very small, but when the large number of shares aggregate, it makes substantial amount which is usable for large corporates.
The total equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs. 2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of the company and have voting rights.

Types of Shares

A Company can issue two types of shares viz. Equity Shares and Preference Shares. While Preference shareholders enjoy the benefit of receiving their dividend distribution first; the equity shareholders enjoy voting rights in major company decisions, including mergers or acquisitions. On the other hand, equity share or ordinary share comes with maximum entrepreneurial risk associated with business.

To read more about the differences between Equity shares and preference shares, click here.

Equity Share

Equity is an instrument for its owner for share in profits (and losses). Equity shares are instruments issued by companies to raise capital and it represents the title to the ownership of a company. An investor becomes an owner of a company by subscribing to its equity capital (whereby investor will be allotted shares) or by buying its shares from its existing owners. As a shareholder, investors bear the entrepreneurial risk of the business venture and are entitled to benefits of ownership like share in the distributed profit (dividend) etc. The returns earned in equity depend upon the profits made by the company, company’s future growth etc.
Equity share is initially issued to those who have contributed capital in setting up an enterprise. This would be called the Public Issue. Apart from a Public Issue, equity shares may originate through an issue of Bonus Shares, Convertible securities etc. All of them are collectively called Common Stock or Simply Stock.
Please note that if the company fails or gets liquidated otherwise, the claim of equity shareholders on earnings and on assets in the event of liquidation, follows all others. Similarly, the dividend on equity shares is paid after meeting interest obligations and dividends to Preference shareholders. That is why the holders of the Equity shares are also known as ‘residual owners’. Since the equity shareholders bear such risks, they expect handsome returns by way of DIVIDENDS and price appreciation of the share, when their enterprise performs well.