What is Equity Share Capital & How to Calculate: Meaning, Formula & Types
Equity Share Capital
In this article, we will ponder equity share capital meaning, its calculation, and its types in detail. Then we will look at the advantages and disadvantages of equity share capital. Further, we will look at the difference between equity share capital and preference share capital. Let's begin!
What Is Equity Share Capital?
Equity share capital is the money a business raises by selling shares to the public. Risk capital is another name for equity share capital. Companies allow the general public to subscribe for shares in the firm to raise the necessary funds. Investors provide funds and buy stock in the company. As a result, equity share capital refers to the funds obtained via the issuance of all the shares. Equity share capital, in a nutshell, is the entire sum of money a firm raises through the issuance of shares. Common shares and preferred shares are categorized as issued shares. They are both included in the equity share capital.
How To Calculate Equity Share Capital?
Equity share capital = Price per share X No. of outstanding shares
Equity share capital = No. Of shares (par value of share + paid-in capital in excess of par value)
What are the types of equity share capital?
There are various types of equity share capital. Now let's discuss them-
1. Authorized Share Capital
It covers a lot of ground. It is the most money a business can raise by issuing shares to meet its capital needs. The corporations are not required to issue the entire permitted share capital. However, they can expand the authorized share capital after adhering to all laws and regulations.
2. Issued Share Capital
For this portion of the authorized share capital, the general public often welcomes applications. Alternatively, the capital that the corporation issued to the general public. It must stay within the authorized share capital restrictions. The authorized share capital cannot be greater than the issued share capital. It also goes by the name "called up capital."
3. Subscribed Equity Share Capital
The part of the issued share capital the investors have subscribed for is known as subscribed share capital. Additionally, the company's subscribed capital rises when members register for shares. Consequently, unsubscribed share capital is the money that remains after subscribed share capital.
4. Paid-Up Equity Share Capital
It is the sum that investors pay as a portion of the subscribed capital. Assuming all businesses accept full payment upfront, the issued, subscribed, and paid capital are equal. Paid-up capital, conceptually speaking, refers to the sum of money a corporation invests in the enterprise. It also goes by the name contributed capital.
5. Bonus Shares
The Companies Act of 2013's Section 63 defines and acknowledges bonus shares. These extra shares were given without charge to the current stockholders. They are distributed as per the number of shares a shareholder already has. The accumulated profits of a business are transformed into bonus shares rather than being dispersed as dividends.
6. Rights Shares
The Companies Act of 2013's Section 62 also defines rights issues. These are the shares that allow shareholders to buy more company shares at a discount from the market price. Right shares, on the other hand, only provide a right. The offer is open for the shareholders to approve or reject.
7. Sweat equity Shares
As the term implies, sweat equity refers to the shares that businesses provide to their employees in appreciation of their commitment and toil. Sweat equity shares are awarded to outstanding firm employees or directors in recognition of their exceptional contributions in the form of know-how or intellectual property rights.
What Benefits Do Equity Share Capital Offer?
Let us now understand the benefits of equity share capital.
Provides A Credit Rating
When you are an investor with equity shares in a corporation, those shares also serve as collateral. So you can use them as collateral if you need a loan to meet your necessities. The equity shares of a corporation demonstrate its creditworthiness, which facilitates the loan approval process.
The most liquid assets are stock shares, which you may quickly sell on the market if the need arises. Therefore, you can immediately sell your investment in an emergency.
The stock split is another further benefit of equity shares. It entails dividing equity shares into smaller pieces and lowering the price of each component. Investors gain as a result of this. Shares become more liquid when their price drops, and if the business is doing well, the high volume will result in a price increase. The stock split helps investors in this way.
Investors might receive significant income from equity share capital. You can simply make a high income by purchasing equity shares in a company. You not only make a good living, but you also receive a consistent dividend.
What Drawbacks Exist About Equity Share Capital?
The following are the disadvantages of equity shares:
Work And Time
Securing a loan requires a lot of time and effort, from filling out the loan application to going through the underwriting procedure. However, obtaining equity investment might be a longer and more difficult procedure. To receive the equity you often require involves the correct connections and an effective pitch deck.
While equity does not require interest payments, its overall cost is often higher than that of debt capital. Since they are the last to be paid if a company goes bankrupt, stockholders are perceived as bearing more risk than creditors. As a result, equity investors expect a higher return rate on their investments. When you issue equity to cover this risk, you often give up more stock for a lower price.
Diluting Of Ownership For The Issuing Company
The share capital has many advantages and disadvantages, but the loss of ownership control is one of the worst drawbacks. The benefits of owner capital investments often include a degree of influence over the business through ownership of a significant portion of the stock.
Your ownership position in your small firm is diminished with each share of stock you sell to investors. If you sell too much stock, you risk losing control of your firm because equity investors often have the opportunity to vote on crucial business decisions.
What Is The Difference Between Equity Share Capital And Preference Share Capital?
The company's common stock is referred to as equity share capital. While preference shareholders have a preferential right to dividend payments in the event of a company's collapse, equity stockholders assume the greatest risk. They do not have voting rights or require the dividend to be paid. They are not permitted to vote or take part in meetings.