Benefits of equity share investment are dividend entitlement, capital gains, limited liability, control, claim over income and assets, right shares, bonus shares, liquidity etc. Disadvantages are dividend uncertainty, high risk, fluctuation in market price, limited control, residual claim etc.
Following are the disadvantages of equity shares:
- Cost of issue of equity shares is high.
- The excessive use of equity shares is likely to result in over capitalization of the company.
- The issuing of equity capital causes dilution of control of the equity holders.
The ownership of a company limited by shares includes the members of the general public. Any person from the public can own a share in the company by buying through the stock exchange. The liability of the shareholders of the company is limited to the nominal value of the shares.
Equity Share Meaning
An equity share, normally known as ordinary share is a part ownership where each member is a fractional owner and initiates the maximum entrepreneurial liability related to a trading concern. These types of shareholders in any organization possess the right to vote.
The limitations of preference shares are as follows :
- The rate of dividend payable on preference share is higher than the rate of interest on debentures.
- The claim of equity shareholders over assets of the company is affected by the issue of preference share capital.
The main features of equity shares are:
- They are permanent in nature. …
- Equity shareholders are the actual owners of the company and they bear the highest risk.
- Equity shares are transferable, i.e. ownership of equity shares can be transferred with or without consideration to other person.
Which of the following is a disadvantage of equity financing?
Disadvantages of equity financing
Shared ownership – in return for investment funds, you will have to give up some control of your business. … Personal relationships – accepting investment funds from family or friends can affect personal relationships if the business fails.
Right Over Assets and Income
This makes you the owner of the assets that the company owns. Also, investors can receive a share of the profits through dividends. They also stand to indirectly benefit when the company makes profits over time by way of an increase in the share’s value.
Disadvantages of share capital
- Reduced control. Selling shares in a company is effectively akin to selling off tiny pieces of its ownership and control. …
- Hostile takeover. …
- Pricing. …
- Overheads. …
- Distraction. …
- Taxation. …
Limited by shares refers to the liability of the shareholders to the creditors of the business for the money that was invested originally. … A company that is limited by shares will divide the share capital into fixed amount shares that can then be issued to shareholders and subsequently become company owners.
A company limited by shares must have at least one shareholder, who can be a director. If you’re the only shareholder, you’ll own 100% of the company. There’s no maximum number of shareholders. The price of an individual share can be any value.
In a company limited by shares, the shareholders’ liability is limited to the amount the shareholder has agreed to pay for his or her shares. In a company limited by guarantee, the liability is limited to the amount of the guarantee set out in the company’s articles, which is typically just £1.
Equity is the ownership stake in the entity or such other valuable business component, while shares are the measurement of the ownership proportion of the individual in that business component.
Thus, there are two types of shares: equity shares and preferential shares.
Equity shares represent the extent of ownership in a company. Preference shares come with preferential rights when it comes to receiving dividend or repaying capital. Shareholders receive dividends after all liabilities have been paid off.