Companies raise two types of capital to source money for their operations: debt capital and equity capital. Debt capital is procured through lender loans where lenders are paid interest on the funds. Equity capital is issued to individuals who want ownership rights in the company. These investors are issued shares of the company stock. There are two broad categories in which shares are issued: preference shares and equity shares.
Equity Shares Definition
Companies pay the shareholders dividends on their investments. These dividends are declared whenever the company makes profits. However, even when the company makes profits, it might choose not to pay dividends and reinvest the money back into the business. Equity shareholders are paid after preference shareholders are paid. Preference shareholders have a set rate at which they are paid; equity shareholders, on the other hand, are paid surplus profits after the preference shareholders are paid. Equity shareholders have voting rights in the company’s business, whereas preference shareholders do not.
The share prices keep fluctuating and varying. The share price is determined by the market conditions, the industry position, the financial standing of the company and the quality of its product(s).Any variation in these is likely to have an effect on the equity share price. An individual can buy these shares from exchanges, stock brokers, banks and websites. The shares are either sold in denominations of 10 or 100 shares.
The dividends that shareholders are paid depend on the profits the company makes. The rate at which these shareholders are paid is not preset. Preference shares come with a predetermined rate. Equity shareholders are always paid in the end after the company has met all its financial commitments. The company first pays all its creditors, then the preference shareholders and finally the equity shareholders. Eventually, the company shareholders are paid as well.
Types of Equity Shares
There are several classifications of equity shares. These are blue chip shares, speculative shares, income shares, speculative shares and cyclical shares. Different classes of shares are issued for the different needs of the company. The money sourced from the issue of these shares is used for different purposes. The money raised from the issue of blue chip equity shares could be used for research and development. The money from income shares might be used to buy a plant and machinery.