{"id":3680,"date":"2021-08-03T15:43:08","date_gmt":"2021-08-03T10:13:08","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=3680"},"modified":"2022-05-24T15:02:05","modified_gmt":"2022-05-24T09:32:05","slug":"equity-share-capital","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/equity-share-capital\/","title":{"rendered":"Equity Share Capital Guide 2021 &#8211; Meaning, Types, Features, Benefits"},"content":{"rendered":"\n<p><a href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/\">Equity<\/a> shares are one of the mainstays of businesses today. The promoters or owners arrange for the maiden source of capital to fund the initial set-up and kickstart of businesses. But promoters have their limits; they cannot finance all the expansionary motives of the company. And companies need funds to grow. This is where equity <a href=\"https:\/\/www.tickertape.in\/blog\/share-capital\/\">share capital<\/a> comes into prominence. In this article, we break down the meaning of equity share capital and its features.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/equity-share-capital\/#What-is-equity-share-capital\" title=\"What is equity share capital?\">What is equity share capital?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/equity-share-capital\/#Why-do-companies-issue-equity-shares\" title=\"Why do companies issue equity shares?\">Why do companies issue equity shares?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/equity-share-capital\/#Why-do-investors-invest-in-equity-shares\" title=\"Why do investors invest in equity shares? \">Why do investors invest in equity shares? <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/equity-share-capital\/#Types-of-equity-shares\" title=\"Types of equity shares\">Types of equity shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/equity-share-capital\/#Features-of-equity-shares\" title=\"Features of equity shares\">Features of equity shares<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/equity-share-capital\/#How-do-equity-shares-work\" title=\"How do equity shares work?\">How do equity shares work?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/equity-share-capital\/#How-to-get-mighty-rich-by-investing-in-equity-shares\" title=\"How to get mighty rich by investing in equity shares?\">How to get mighty rich by investing in equity shares?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/equity-share-capital\/#Active-investing\" title=\"Active investing\">Active investing<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.tickertape.in\/blog\/equity-share-capital\/#Passive-investing\" title=\"Passive investing\">Passive investing<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.tickertape.in\/blog\/equity-share-capital\/#Downsides-of-investing-in-equity\" title=\"Downsides of investing in equity:\">Downsides of investing in equity:<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"what\"><span class=\"ez-toc-section\" id=\"What-is-equity-share-capital\"><\/span><strong>What is equity share capital?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>To meet the requirement of funds, companies seek out investors and issue them <a href=\"https:\/\/www.tickertape.in\/blog\/what-are-equity-shares-meaning-types-features-limitations-and-more\/?utm_source=blog&amp;utm_medium=article\">equity shares<\/a>. The capital raised by issuing such shares is referred to as equity share capital. <a href=\"https:\/\/www.tickertape.in\/blog\/what-are-equity-shares-meaning-types-features-limitations-and-more\/\">Equity shares<\/a> once issued become a continuous source of funds for the company and are not paid off or redeemed until an event of liquidation of the company. In the meantime, equity <a href=\"https:\/\/www.tickertape.in\/blog\/shareholders\/\">shareholders<\/a> enjoy a claim to a share of the net profit through dividends and become part-owners in the company equivalent to their amounts of share purchase. Even in the event of liquidation, they are entitled to a share of the residual assets.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"why\"><span class=\"ez-toc-section\" id=\"Why-do-companies-issue-equity-shares\"><\/span><strong>Why do companies issue equity shares?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Having tackled the question of equity shares meaning let&#8217;s move onto the need for companies to issue equity shares. The obvious answer is to raise capital for business growth and expansionary motives. But why equity shares and why not debt financing? This is because raising capital through debt is akin to a dangling sword, you need to repay the debt along with interest, also your debt-to-equity ratio takes a plunge as you borrow more. There is no such repayment obligation in the case of equity financing, moreover, it is at the company&#8217;s discretion to pay a <a href=\"https:\/\/www.tickertape.in\/blog\/cash-dividend-vs-stock-dividend\/\">dividend<\/a>; it is not a liability.<\/p>\n\n\n\n<p>Below are some common reasons why companies issue equity shares:<\/p>\n\n\n\n<ul><li>Raising capital to start a business (Private Equity)<\/li><li>To finance <a href=\"https:\/\/www.tickertape.in\/blog\/mitigating-portfolio-risk-through-diversification\/\">diversification<\/a>, acquisition, expansion, and strategic alliances&nbsp;<\/li><li>Opportunity for family and friends of the promoters and founders to buy stakes<\/li><li>Paying outstanding debt owed by the company<\/li><li>Creating a sustainable cash reserve for future<\/li><\/ul>\n\n\n<span class='bctt-click-to-tweet'><span class='bctt-ctt-text'><a href='https:\/\/twitter.com\/intent\/tweet?url=https%3A%2F%2Fwww.tickertape.in%2Fblog%2Fequity-share-capital%2F&#038;text=Raising%20capital%20through%20debt%20is%20like%20to%20a%20dangling%20sword.%20Where%20you%20need%20to%20return%20the%20amount%20with%20interest%2C%20also%20your%20debt-to-equity%20ratio%20decreases%20as%20you%20borrow%20more.&#038;via=TickertapeIN&#038;related=TickertapeIN' target='_blank'rel=\"noopener noreferrer\">Raising capital through debt is like to a dangling sword. Where you need to return the amount with interest, also your debt-to-equity ratio decreases as you borrow more. <\/a><\/span><a href='https:\/\/twitter.com\/intent\/tweet?url=https%3A%2F%2Fwww.tickertape.in%2Fblog%2Fequity-share-capital%2F&#038;text=Raising%20capital%20through%20debt%20is%20like%20to%20a%20dangling%20sword.%20Where%20you%20need%20to%20return%20the%20amount%20with%20interest%2C%20also%20your%20debt-to-equity%20ratio%20decreases%20as%20you%20borrow%20more.&#038;via=TickertapeIN&#038;related=TickertapeIN' target='_blank' class='bctt-ctt-btn'rel=\"noopener noreferrer\">Click To Tweet<\/a><\/span>\n\n\n<h2 class=\"wp-block-heading\" id=\"invest\"><span class=\"ez-toc-section\" id=\"Why-do-investors-invest-in-equity-shares\"><\/span><strong>Why do investors invest in equity shares? <\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>An investor is always looking to earn money, and investing in equity shares is one of the fastest buses to a higher financial altitude.&nbsp;<\/p>\n\n\n\n<p>Investors buy equity shares in the company, banking on the company&#8217;s potential to achieve tremendous success\u2014the longing to reap the appreciation in the stock price.<\/p>\n\n\n\n<p>Investors buy equity shares:<\/p>\n\n\n\n<ul><li>To avail attractive dividend payouts<\/li><li>To be eligible to receive bonus and rights shares<\/li><li>As a cover against inflation (as equity is one of the best performing asset classes)&nbsp;<\/li><li>Adding a fair share of equity to diversify their investment portfolio&nbsp;<\/li><li>Be a part of the decision making of the company by receiving voting rights<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"types\"><span class=\"ez-toc-section\" id=\"Types-of-equity-shares\"><\/span><strong>Types of equity shares<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Authorized share capital: <\/strong>It is the maximum amount of capital a company can raise by issuing shares. The company may decide not to issue the total capacity and even increase the authorized share capital complying with certain legal formalities.<\/p>\n\n\n\n<p><strong>Issued share capital:<\/strong> That part of authorized <a href=\"https:\/\/www.tickertape.in\/blog\/share-capital\/?utm_source=blog&amp;utm_medium=article\">share capital<\/a> for which applications are invited from the public.<\/p>\n\n\n\n<p><strong>Subscribed share capital: <\/strong>The amount of issued share capital subscribed by investors, i.e., <a href=\"https:\/\/www.tickertape.in\/blog\/shares\/?utm_source=blog&amp;utm_medium=article\">shares<\/a> agreed to pay for when asked.<\/p>\n\n\n\n<p><strong>Paid-up capital: <\/strong>It constitutes the actual capital invested in the business. It is the portion of subscribed share capital for which investors pay their agreed sum to the company. <\/p>\n\n\n\n<p><strong><a href=\"https:\/\/www.tickertape.in\/blog\/bonus-shares\/\">Bonus shares<\/a>:<\/strong> Also known as scrip issue or capitalization issue. Bonus shares do not involve any cash flows; they are issued out of retained earnings to bring employed capital of the company in line with the issued capital. If a company makes profits, the capital employed increases; to offset this increase, additional shares are given to the existing shareholders free of cost instead of increasing their current stakes.<\/p>\n\n\n\n<p><strong>Rights shares: <\/strong>As described under Section 62 (1) of the Companies Act 2013, rights shares are issued to extend a pre-emptive right to the existing shareholders to buy additional shares in the company at a discounted price. However, as the name suggests, rights shares offer only a right and are not an obligation; shareholders are well within their capacity to decline the invitation.<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/www.tickertape.in\/blog\/sweat-equity-shares-meaning-merits-taxation\/\">Sweat equity shares<\/a>:<\/strong> Section 2 (88) of the Companies Act, 2013 defines <a href=\"https:\/\/www.tickertape.in\/blog\/sweat-equity-shares-meaning-merits-taxation\/?utm_source=blog&amp;utm_medium=article\">sweat equity shares<\/a> as shares issued to existing employees and directors for their hard work towards the company. Sweat equity shares are provided at a discounted price or for non-monetary considerations.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"features\"><span class=\"ez-toc-section\" id=\"Features-of-equity-shares\"><\/span><strong>Features of equity shares<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li>Equity shares are an instrument of long-term financing<\/li><li>Equity shares remain with the company as long as it&#8217;s a going concern and are only paid off in cases of liquidation or winding up of the company&nbsp;<\/li><li>Equity shareholders enjoy the right to vote on matters of the company&nbsp;<\/li><li>Equity shareholders enjoy limited liability. Their liability towards the company is fixed to the value of shares they&#8217;ve bought<\/li><li>Equity shareholders are entitled to receive a dividend on surplus profits earned. However, the rate of dividend is not predetermined; there&#8217;s a possibility that no dividend is paid during a year at all&nbsp;<\/li><li>Equity shareholders are given preference over potential investors during a further public placement of shares&nbsp;<\/li><li>Though equity shares are irredeemable, they are transferable, and they can be used as an instrument of trading<\/li><\/ul>\n\n\n\n<p>Now when you know what equity shares are, let&#8217;s look at how they work.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how\"><span class=\"ez-toc-section\" id=\"How-do-equity-shares-work\"><\/span><strong>How do equity shares work?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Equity shares are a win-win deal for both the company and investors. While the company meets its capital requirements, the shareholders get to become part-owners of the company. The company escapes the vicious clutches of debt financing, which would have been the other available alternative. As a result, the company doesn&#8217;t need to worry about repaying the capital raised during its lifetime.&nbsp;<\/p>\n\n\n\n<p>The investors are happy because they are entitled to dividends, bonus shares, rights shares, and they are free to transfer their shares in the market as and when they wish to. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"rich\"><span class=\"ez-toc-section\" id=\"How-to-get-mighty-rich-by-investing-in-equity-shares\"><\/span><strong>How to get mighty rich by investing in equity shares?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There are two approaches to make money by investing in equity shares that address the above question.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Active-investing\"><\/span><strong>Active investing<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Investing in shares for short durations to earn some quick profit. The risk to reward ratio here is high. This investing strategy involves:<\/p>\n\n\n\n<ul><li><strong>Scalping:<\/strong> Profiting from the smallest of price changes multiple times a day.&nbsp;<\/li><li><strong><a href=\"https:\/\/www.tickertape.in\/blog\/what-is-intraday-trading\/\">Intraday trading<\/a>:<\/strong> Squaring-off trades within one trading session.&nbsp;<\/li><li><strong>Delivery trading:<\/strong> Holding trades for multiple trading sessions, generally for several days. <\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Passive-investing\"><\/span><strong>Passive investing<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><a href=\"https:\/\/www.tickertape.in\/blog\/how-to-invest-in-shares\/?utm_source=blog&amp;utm_medium=article\">Investing in shares<\/a> for a longer duration and holding stocks for years without reacting to market fluctuations. The risk involved remains the same as the underlying asset is the same, however, the potential for growth is greater as equity tends to perform well over longer durations.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"investing\"><span class=\"ez-toc-section\" id=\"Downsides-of-investing-in-equity\"><\/span><strong>Downsides of investing in equity:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Equity shares are not your sure-shot ticket to a more prosperous journey; they don&#8217;t come with a guarantee. They, too, have certain limitations.<\/p>\n\n\n\n<p>From the company&#8217;s point of view:<\/p>\n\n\n\n<ul><li>Equity shareholders need to be given voting rights, causing dilution of the control over management by the owner group&nbsp;<\/li><li>Since equity shares are irredeemable, the capital structure of the company becomes rigid<\/li><li>Equity financing provides no tax benefits to the company<\/li><\/ul>\n\n\n\n<p>From an investor&#8217;s point of view:<\/p>\n\n\n\n<ul><li>If the company underperforms over the years, posts continuous losses, and doesn\u2019t pay dividends, the equity shareholders might not even get their invested money back<\/li><li>There&#8217;s nothing like fixed income; for instance, the dividend income<\/li><li>Preferential shareholders have preferential rights over their equity counterparts<\/li><li>With subsequent issues of shares, the voting rights of existing shareholders get diluted<\/li><\/ul>\n\n\n\n<p>The companies that we see today amassing thousands of crores of <a href=\"https:\/\/www.tickertape.in\/blog\/market-capitalisation-meaning\/?utm_source=blog&amp;utm_medium=article\">market capitalization<\/a> wouldn&#8217;t have raised even a fraction of the capital they have without equity shares. Thus, equity shares play an important role in meeting fund requirements by the company and also help investors amass wealth over time. That said, it is prudent to assess your risk profile before adding equity to your investment portfolio.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Equity share capital is the money raised by a company for its capital. Looking to get information on share capital? Click here to know equity share capital meaning, types, features<\/p>\n","protected":false},"author":27,"featured_media":3683,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[9,1738],"tags":[475,476],"acf":[],"modified_by":"Aradhana Gotur","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/08\/Informative-1.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/3680"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/27"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=3680"}],"version-history":[{"count":6,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/3680\/revisions"}],"predecessor-version":[{"id":8672,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/3680\/revisions\/8672"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/3683"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=3680"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=3680"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=3680"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}