Equity Shares and their Shared Privileges

Equity share refers to the fraction of a company’s assets which gives its shareholders a part of the entrepreneurial profits, risks and ownership rights of the business. These shares, also called “stocks”, give investors the right to vote, share income and claim to a company’s assets. 

Majority of companies start working on equity finance as the source of capital provided by pioneer owners. As growth continues to take place, the need for greater capital arises as well. This signals a company’s search for investors to upload more capital and acquire equity shares from them.

Why Investors Prefer to Invest in this Shares

Permanent source of funds

Equity shares are a company’s permanent capital and cannot be redeemed from a shareholder at any time. Law mandates no company to purchase its own shares. 

Bestows ownership rights to shareholders

Equity shareholders are the actual owners of a company. This means that they also share in the growth and success of the corporation. 

Provides voting rights to shareholders

Since stockholders share ownership rights, they also enjoy voting rights during the company’s election of the Board of Directors to participate in building business strategies. 

Grants limited liability according to the amount of equity share

Shareholders’ liability is limited to the value of the shares they own within a company. This is because a company is an individual entity, separate from its shareholders. Once a stockholder has fully paid the price of share, further losses will not be his liability even at the time of liquidation. 

Subject to liquidation with all shareholders

A company’s Board of Directors annually present company’s financial report attended by everyone who owns a stock in the company.

Different types

Common Stock

This most frequently traded and owned stock provides shareholders all aforementioned equity share characteristics. It means that common stock owner shares with the company’s profit, ownership, voting rights and liquidation. 

Preferred stock

This stock entitles shareholders to a fixed income stream, considerably more predictable and reliable than the common shares provide. Shareholders receive an annual dividend equal to an original issue price multiplied by a coupon rate provided in the preferred stock. 

Shareholders of preferred stocks are above common stockholders in priority. For example, if the board suspends preferred dividend payments, common stockholders’ dividend are suspended as well. 

Although, preferred stockholders do not have voting rights as the common owners. They cannot influence the company’s strategic direction.                       

Convertible preferred stock

This type of equity shares establishes a subdivision of preferred stock. At a so-called conversation ratio, these primarily preferred stocks can be exchanged for common shares.