Equity Shares and its Types
If you are a beginner in the stock market, you need to know the types of equity shares. The first main source of capital is the owner's investment and in listed companies in exchanges, it is in the form of equity share capital.
What is Equity share?
A company started with an investment by owners or promoters, After a certain level of growth, they need capital for further growth in the future. So they look into investors and issue fresh shares to these investors. They offer shares through initial public offers ( IPO) to public investors. For an investor, an equity share refers, you are part of the company and fractional owner. When an investor buys the shares they will get dividends from the company, share profits, capital appreciation, and right to vote. Also, investors can sell these shares at any time in the open market.
There are different types of equity shares.
Authorized share capital:
It is the maximum number of shares that a company can issue legally according to the corporate character. It will not increase without shareholder approval. There are some formalities to increase it.
Issued share capital:
It is the value of the company shares and approved shares which they give to investors. Investors hold the shares of the company. This includes institutional investors and individual retail investors. Issued shares cannot exceed authorized share capital.
Subscribed share capital:
It is the part of issued share capital in which the company received a subscription from the investor. It may be oversubscribed or undersubscribed.
Paid-up capital:
This is part of the subscribed capital. The total amount paid by shareholders is called paid-up capital. The company invests the paid-up capital in operations. The company receives paid-up capital only in the primary market through IPO.
Right shares:
Right shares are issued to their existing shareholders at a lower price than the market price. These shares are given to protect the ownership of the existing investors.
Bonus shares:
If the company makes profits they give dividends to their investors and it is called bonus shares. Bonus shares increase the total number of outstanding shares and it will be beneficial for the shareholders.
Sweat equity shares:
It provides to the directors and other employees of an organization for providing intellectual property rights or know-how or any value additions to the company. It cannot be alloted more than 15% of the paid capital.
Employee stock option plan ( ESOP):
When a company wants to reward and motivate the employees, they offer ESOP. The employees can buy the shares of the company at a lower price than the market price within a specific time. The company believes the employees will feel ownership by holding their company shares.
Preference shares:
Preference shares refer to a stock dividend, paid to shareholders before common dividends are issued. If the company goes bankruptcy preference shareholders will get paid first before the common shareholders. Preference shareholders do not hold any voting rights in the company.
