Shares - Meaning and Types
Meaning of Shares
Share is the smallest unit into which the total capital of the company is divided. For example, when a company decides to raise ₹ 10 cores of capital from the public by issuing shares, then it can divide its capital into units of a definite value, say ₹ 10/- or ₹ 100/- each. These individual units are called as its shares. The investors who have purchased the shares or invested money in the shares are called the shareholders. They get dividend as return of their investment.
Types of shares
1. Equity Shares
2. Preference shares.
1. EQUITY SHARES
According to Section 85 of The Companies Act, 1956, an equity share is a share which is not a preference share, it means shares which do not enjoy any preferential right in the payment of dividend or repayment of capital, are termed as equity shares.
There is no fixed rate of dividend for equity shareholders but depends upon the surplus profits. In fact they are regarded as the owners of the company who exercise their authority through the voting rights they enjoy. The money raised by issuing such shares is known as equity share capital also called as ownership capital or owners’ fund.
Merits of Equity Shares
From Shareholders’ point of view:
1. Real owners:
The equity shareholders are the owners of the company.
2. Suitable for bold investors:
It is suitable for those who want to take risk for higher return.
3. Benefit of increased value:
The value of equity shares goes up in the stock market with the increase in profits of the concern.
4. Liquidity:
Equity shares can be easily sold in the stock market.
5. Limited liability:
The liability is limited to the nominal value of shares.
6. Voting right:
Equity shareholders have a say in the management of a company as they are conferred voting rights.
From Management’s point of view:
1. No charge on assets:
A company can raise capital by issuing equity shares without creating any charge on its fixed assets.
2. No burden of repayment:
The capital raised by issuing equity shares is not required to be paid back during the lifetime of the company. It will be paid back only when the company is winding up.
3. No burden of dividend:
There is no binding on the company to pay dividend on equity shares. The company may declare dividend only if there is enough profits.
4. Confidence among creditors:
If a company raises more capital by issuing equity shares, it leads to greater confidence among the creditors.
Limitations of Equity Shares
From Shareholders’ point of view
1. No assured return:
Equity shareholders get dividend only when the company earns sufficient profits. The decision to declare dividend lies with the Board of Directors of the company.
2. Speculation:
There is high speculation in equity shares. This is particularly so in the time of boom when profitability of the companies is high.
3. High degree of risk:
Equity shareholders bear a very high degree of risk. In case of losses they do not get dividend, and in case of winding up of a company, they are the last to get the refund of their money invested.
From Management point of view
1. Time consuming:
It requires more formalities and procedural delay to raise funds by issuing equity shares.
2. Costly:
Also the cost of raising capital through equity share is more as compared to debt.
3. Risk of dilution of control:
As the equity shares carry voting rights, groups are formed to get the votes and grab the control of the company which can prove to be harmful for the smooth functioning of a company.