Equity Capital

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What is Equity Capital?

Equity capital is funds paid into a business by investors in exchange for common or preferred stock. This represents the core funding of a business, to which debt funding may be added.

Every company has a statutory right to issue shares to raise funds. Also known as ordinary shares are issued to the owners of a company. Ordinary share has a nominal or face value. Dividend on these shares is paid after the fixed rate of dividend has been paid on preference shares, if any amount is left.

The rate of dividend on equity shares is not fixed and depends upon the profits available and the intention of the board to distribute dividend among shareholders.

In case of winding up of the company, equity capital can be paid back only after every other claim including the claim of preference shareholders has been settled.

  • The most outstanding feature of equity capital is that its holders control the affairs of the company and have an unlimited interest in the company’s profits and assets.
  • Equity shareholders enjoy voting right on all matters relating to the business of the company and are considered real owners of the business.

Advantages of equity shares financing

  1. Permanent Capital: Equity shares are a good source of long-term finance. A company is not required to pay-back the equity capital during its lifetime and therefore, it is a permanent source of capital for the business.

  2. No Fixed Burden: Equity shares are also called residual equity and it is not mandatory to give dividends to the equity shareholders. Because the dividend on these shares is subject to the availability of profits and the intention of the board of directors. They may not get the dividend even when a company has profits. Thus they provide a cushion of safety against unfavourable development.

  3. Voting rights: Every equity shareholders has the right to vote on every resolution placed before the general body of shareholders. Voting rights of each shareholder are in proportion to his or her share of the paid-up capital of the firm.

  4. Claim on income and on asset: The shareholders have a residual claim on the income and assets of the firm.

  5. Credit worthiness: Issuance of equity share capital creates no change in the assets of the company. A company can raise further finance on the security of its fixed assets.

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