The phrase “equity shares” is perhaps the commonest one that floats around when people discuss stock markets and companies. Equity refers to the total amount of money that a company shall return to its shareholders upon winding up, and shares or stocks represent the measure of such capital to which each shareholder is entitled.
Equity shares are representative of stakes in ownership of a company. If, for instance, Ms. Priya holds Rs. 10,000 worth of equity shares in Company M, then she holds stake equivalent to that amount in that organisation.
Apart from equity shares, companies can also issue preference shares. However, a company’s primary source of raising capital is via the different types of equity shares. Usually, companies confer an array of entitlements to holders of equity shares.
One of the primary entitlements that equity shareholders enjoy is voting rights. They can exercise such voting rights in regard to a company’s policies as well as the election of directors. However, based on different types of equity shares, the weight of each share in relation to voting count may vary. But, typically, a single stock is equivalent to one vote.
Alongside voting rights, equity shareholders are also entitled to attend general meetings and annual general meetings of an organisation. Plus, they enjoy dividend payments; although, companies are not bound to disburse dividends periodically to equity shareholders, and the payment does not follow any fixed rate.
Therefore, most investors vest their interest in equity shares as a device for capital appreciation not because of dividends but because of share price fluctuations. Investors sell their holdings when prices are high and buy when prices are low to maximise their returns from varying types of equity shares.
However, a significant downside of equity shares is that shareholders need to assume liability for a company’s losses, to the extent of their holding.
Based on the definition, types of equity shares are –
As the name might suggest, bonus shares are those stocks that companies issue to the existing shareholders sans any additional charge. Through the issuance of bonus shares, companies can convert their retained earnings into stocks. Usually, companies provide these bonus shares to shareholders instead of paying out dividends.
Furthermore, organisations issue bonus shares on a pro-rata basis. So, if Mr. Amit holds 200 shares of Hindustan Unilever Ltd and the company announces its decision to issue 1:4 as a bonus, then he will receive 50 additional shares for free.
Right shares refer to the offerings that a company makes to its existing shareholders to purchase new shares at a specific price within a particular period. In other words, the right shares are those new stocks on which existing stakeholders can lay claim before such issuing company opens them up to public trading.
Similar to bonus shares, companies issue the right shares on a pro-rata basis as well. Therefore, if a company is offering 2000 new shares, and a shareholder possesses 2% of its existing lot, then he/she is entitled to 40 of those new offerings.
Organisations often compensate employees or directors on a job well done by issuing sweat equity shares. Sweat equity literally refers to an individual’s contribution – typically not monetary – to an organisation.
Thus, sweat equity shares denote stocks that companies issue to reward such contributions. Several companies use this compensation method to enhance employee retention by endowing them with a stake in that organisation’s assets and ownership.
Typically, most types of equity shares carry voting rights because of the stake in ownership it entails. However, in some cases, companies can issue shares with the condition that it will confer differential or no voting right at all to such shareholders.
For instance, in 2008, Tata Motors issued ‘A’ shares with the condition that 10 such shares will equate to one vote. That’s the differential voting right. However, it perked up share in profit by 5% for such stocks compared to its ordinary counterpart.
Every public limited company needs to mention an authorised share capital amount in its Memorandum of Association. Such amount is the extent of capital that a company can raise by issuing equity shares. However, companies can increase the authorised share capital amount through a host of legalities.
It denotes the nominal value of all shares that a company has issued. For instance, if the nominal value of one stock is Rs. 100 and a company has issued 20,000 such shares, then its issued share capital will be Rs. 20 lakh.
It refers to that part of issued capital to which investors have subscribed. Referring to the above example, in case investors have purchased 15,000 shares of that company, then its subscribed capital would be Rs. 15 lakh. If investors buy all the stocks that a company has issued, then issued and subscribed equity shall be the same.
The amount of money investors pay against its holdings of a company’s stock is its paid-up capital. Usually, shareholders pay the entire amount at one go, and therefore, subscribed and paid-up equity refer to a single amount. Furthermore, if a stock is trading at a premium, then that excess amount is accounted as shares premium.
Based on returns, equity shares and its types can be classified as –
It typically refers to stocks of those companies that pay dividends regularly. These organisations are usually well-established with steady net incomes. Therefore, dividend stocks are an ideal investment avenue for risk-averse investors.
Growth stocks are associated with those organisations that will most likely grow at an exceptional rate, trumping the average pace. These companies do not pay dividends usually, but instead, their equity shares provide staggering capital gains to investors. These types of equity shares are suitable for investors with a high-risk aptitude.
These are shares that trade at a price lower than its intrinsic value. Thence, these types of shares are primarily suitable for value investors who anticipate the market to quickly catch up, resulting in a share price appreciation of such stocks.