Equity ownership in a company is represented by an equity share. An investor who owns these equity shares is the equity shareholder of a company. Dividends from any earnings the company makes are owed to these shareholders. They also bear the brunt of any losses the business may sustain. To put it simply, if you possess equity shares in a company, you have a stake in the issuing company proportionate to the number of shares you have purchased. Equity shares or stocks can be transferred and are actively traded on stock exchanges by investors. As an equity shareholder, you have the right to dividend payments in addition to voting rights on various matters.
The total amount of equity shares associated with ownership of the company is the equity share capital. The equity share capital is also the difference between the total assets owned by the company minus all the liabilities on the balance sheet. Any company can raise funds by issuing its equity shares. There are 2 ways of raising equity share capital. A company can raise and issue shares privately. A company listed on the stock exchange will raise capital through Initial Public Offer (IPO).
Following are the different types of share capital:
1. Authorised Share Capital
At the time of incorporation, every company must declare the total share capital they will raise eventually. A company may or may not raise the entire authorised capital at once. Every company declares the amount of capital they seek to register in their Memorandum of Association. The number thus specified is the registered, authorised or nominal capital. In simple terms, it is the amount of money that a company can raise through a public subscription.
2. Issued Share Capital
Issued Share Capital is the portion of the nominal capital that is available for public subscription as shares. However, a company doesn’t have to issue all of its registered capital at once. They may go for further issues, as well. Therefore, it depends on the financing requirements of the company.
Issued capital must never exceed authorized capital in any circumstance. Generally, it refers to all of the shares that the signatories of the memorandum of association, the general public, vendors, etc., hold.
3. Unissued Share Capital
Unissued Share Capital is that portion of the authorized capital that is not yet issued. In other words, it is the difference between the authorized share capital and the issued share capital.
4. Subscribed Equity Share Capital
Sometimes, the entire issued capital is not subscribed to by the general public. Only a part of issued capital that is subscribed by the general public is subscribed capital. Therefore, the subscribed capital is not always the same as the issued capital.
5. Called-Up Capital
It is a common practice that shareholders pay the share price in instalments. For example, application allotment, first call, final call, etc. Therefore, called-up capital is the portion of subscribed capital that the company calls upon or demands the shareholders to pay.
6. Uncalled Capital
Uncalled capital is the unpaid portion of the issued capital that will be considered as subscribed capital upon payment. In simple terms, these are shares that have been issued but haven’t been claimed. Only upon receiving payments against these shares, they will become part of the subscribed capital.
7. Paid-Up Equity Share Capital
Paid-up capital is a part of called-up capital. It refers to the amount of money paid by shareholders in response to a company’s call. Typically, a company’s paid-up capital is calculated by deducting outstanding calls from called-up capital.
8. Fixed Capital
The existing assets of the company are part of the fixed capital. For example, building, land, furniture, machinery, intellectual property rights, plants, etc.
9. Reserve Capital
A company cannot access the reserve capital until it is in the process of liquidating or winding up. Only through a special resolution with a 3/4th majority vote in favour, a company can establish reserve capital.
The Articles of Association cannot be changed to make the reserve liability available at any time after they have been constituted. Also, the company cannot use such capital as collateral for loans. Furthermore, the company requires a court order to change it to ordinary capital, and it’s only available to creditors when a business is closing down.
10. Circulating Capital
Circulating Capital is part of a company’s subscribed capital. Operating assets like receivables, book debts, bank reserves, etc., form part of the circulating capital. Furthermore, it is the capital that the company uses for its fundamental operations.
- Ownership: You acquire a share of the company’s ownership when you buy shares of a company. As a result, you become the owner of the company’s assets. Additionally, dividends are another way for investors to partake in earnings. Thus, they stand to gain when the business becomes profitable over time due to an increase in share value.
- Voting Rights: You acquire voting rights in a firm when you purchase its stock. As a result, you can take ownership of and exercise control over a company by purchasing its shares. Even shareholder meetings and other significant business gatherings are open to you.
- Potential Returns: The opportunity for profits that exceed inflation exists with equity shares. Moreover, with increasing inflation is it imperative to invest in options that have the potential to deliver inflation-beating return on investment.
- Investment with Lower Amounts: A potential stock market investor can get started with a relatively small sum of money. There is no minimum amount necessary to invest in the stock market. The flexibility of buying, selling and holding shares at any time and for however long you choose is another advantage of investing in a stock.
- Volatility: Equity share prices are quite volatile because the market price of a share is determined by a variety of factors. These factors are market sentiment, and social and political concerns, among others. This means there is a risk associated with a direct equity investment in shares of a company. An investor must research the performance, potential growth, and economic factors before investing.
- Others: Even though selling equity shares is very quick and simple it involves much more than a mere transaction. In the equity market, the timing of buying and selling is very crucial. A long-term investment objective is much appreciated for capital appreciation and growth. Hence, if an investor remains invested for a long period of time then he or she can avoid short-term volatility. In a way, though liquidity is available at your fingertips, exercising it involves a thorough analysis and understanding.