Question

What is meant by Equity Shares?

What are equity shares?

Answer 1

• Equity shares do not carry any special or preferential rights in the payment of annual dividends or repayment of capital. The rate of dividend on such shares is not fixed.
• Dividends on equity shares are paid out of the residual profits left after paying interest on debentures and dividends on preference shares.
• Similarly, equity shareholders are paid at the company's winding-up after all debts and preference shareholders have been paid in full. They are entitled to receive what is left after all prior claims have been satisfied.
• Therefore, equity shareholders are the real risk-bearers. But they share in the increasing profits of the company.

Answer 2

1. Equity shares are the most common form of shares issued by a company. They represent the ownership capital of a company, and the holders of these shares are known as equity shareholders or ordinary shareholders. By purchasing equity shares, investors become part-owners of the company and are entitled to voting rights on important matters such as electing directors and approving major policies.
2. Equity shareholders are rewarded with dividends, but unlike preference shareholders, the dividend is not fixed or guaranteed. It is paid only when the company earns sufficient profits and after all other obligations like interest, taxes, and preference dividends are met. In case the company is liquidated, equity shareholders have a residual claim on the assets, meaning they are paid only after all debts and preference shares are cleared.
3. These shares are permanent in nature and cannot be redeemed during the lifetime of the company. They are also freely transferable and traded on stock exchanges, which provides liquidity and a chance for capital appreciation. However, equity shares carry a higher risk compared to other forms of investment, but they also offer the potential for higher returns, especially in the long term.