Equity share capital refers to the funds a company raises by issuing shares to the public. This is a key part of the company’s financial foundation, as it represents the ownership interests of the company.
Content:
- What is Equity Share Capital?
- Equity Share Capital Example
- Types Of Equity Share Capital
- How To Calculate Equity Share Capital? – Equity Share Capital Formula
- Merits And Demerits Of Equity Shares
- Equity Vs Share Capital
- What is Equity Share Capital? – Quick Summary
- Equity Share Capital Meaning – FAQs
What is Equity Share Capital?
Equity share capital is the core funding of a company, raised through selling shares to investors. It represents the ownership interest of shareholders in the company, entitling them to dividends and voting rights. Equity share capital is crucial for a company’s growth and financial stability, providing the necessary funds for operations and expansions without incurring debt. It’s a key indicator of a company’s financial health and investor confidence.
Equity Share Capital Example
An example of equity share capital is when a company, say XYZ Ltd., issues 1 lakh shares at ₹10 each, raising a capital of ₹10 lakh. This capital is used for business growth, and shareholders gain ownership rights and dividends.
How To Calculate Equity Share Capital? – Equity Share Capital Formula
The formula for calculating equity share capital is Total Issued Shares x Par Value per Share.
To calculate equity share capital, determine the total number of shares issued by the company and multiply it by the par value of each share. This figure represents the total equity capital raised from shareholders.
Suppose a company issues 2 million shares with a par value of ₹5 each. The equity share capital is calculated as 2 million x ₹5 = ₹10 million. This amount represents the capital raised through share issuance.
Types Of Equity Share Capital
Types of share capital include authorized (maximum stock a company can sell), issued (shares sold and paid for), subscribed (shares investors commit to buy), paid-up (actual funds received for shares), and reserve (unissued capital reserved for future needs or specific purposes).
- Authorized Share Capital
- Issued Share Capital
- Subscribed Share Capital
- Right Shares
- Sweat Equity Shares
- Paid-up Capital
- Bonus Shares
Authorized Share Capital
Authorized Share Capital is the maximum amount of share capital that a company is legally authorized to issue to shareholders. It sets a cap on how many shares the company can offer and is sometimes called “nominal” or “registered” capital.
Issued Share Capital
Issued Share Capital refers to the portion of authorized share capital that has been allocated and issued to shareholders. It represents the number of shares sold to investors and for which the company has received payment.
Subscribed Share Capital
Subscribed Share Capital includes those shares that investors have committed to purchase and have been allocated by the company. These shares have been subscribed to by the shareholders but not necessarily paid for in full.
Right Shares
These are shares offered to existing shareholders in proportion to their existing holdings, allowing them to maintain their ownership percentage in the company. Right shares are typically offered at a discount to the current market price.
Sweat Equity Shares
Sweat Equity Shares are issued by a company to its employees or directors at a discount or for consideration other than cash, as a reward for their work. They are a way to incentivize and retain key employees.
Paid-up Capital
Paid-up Capital is the portion of issued capital that shareholders fully pay for. Paid-up capital indicates the amount of money the company has received from shareholders in exchange for shares of stock.
Bonus Shares
These are additional shares given to the existing shareholders without any additional cost, based on the number of shares a shareholder owns. These are issued out of the company’s accumulated earnings or reserves.
Merits And Demerits Of Equity Shares
The primary merit of equity shares is the potential for substantial returns through capital appreciation and dividends, while the main demerit includes exposure to higher market volatility, leading to possible capital losses.
Merits:
- High Return Potential: Investing in equity shares offers the possibility of substantial capital gains as share prices increase over time. Shareholders benefit directly from the growth and success of the company.
- Dividend Income: Equity shareholders may receive a portion of the company’s profits as dividends, providing a source of income and potential price appreciation.
- Voting Rights: Shareholders usually have the right to vote on critical company decisions, including board elections and policy changes, giving them a voice in corporate governance.
- Ownership Equity: Holding equity shares is equivalent to owning a part of the company, entitling shareholders to a share in the assets during liquidation after all debts have been paid off.
- Pre-emptive Rights: Shareholders often have the right to purchase new shares before the company offers them to the public, allowing them to maintain proportionate ownership.
Demerits:
- Higher Risk: Equity shares are exposed to market fluctuations, making them riskier than debt instruments like bonds, which can lead to substantial losses.
- Variable Dividends: Dividends are paid out of profits, and if a company does not perform well, dividends can be cut or not paid at all, which can be a disadvantage for investors seeking steady income.
- Diluted Control: As more shares are issued, an individual shareholder’s influence over company decisions can be diluted unless they purchase additional shares to maintain their ownership percentage.
Equity Vs Share Capital
The main difference between equity and share capital is that equity represents the total ownership value of a company, while share capital specifically refers to the funds raised through issuing shares.
| Parameter | Equity | Share Capital |
| Definition | Equity is the total ownership interest in a company, including all shares, retained earnings, and reserves. | Share capital is the funds raised by a company through the issuance of shares to investors. |
| Components | Includes share capital, retained earnings, and other reserves. | Limited to the nominal value of shares issued. |
| Representation | Represents the net worth or book value of a company. | Represents the capital contributed by shareholders at the time of issuance. |
| Impact on Financial Statements | Reflected in the equity section of the balance sheet. | Reflected as a part of equity on the balance sheet but specified as issued capital. |
| Investor Return | Returns are realized through dividends and capital gains. | Returns primarily come from potential dividends and capital appreciation. |
| Risk | Overall equity is subject to the risk of the entire business. | Risk is limited to the fluctuation in share prices. |
| Legal Standing | Equity holders are owners and are last to claim in the event of liquidation. | Share capital investors have a claim to the residual value after debts are paid in a liquidation scenario. |
To understand the topic and get more information, please read the related stock market articles below.
What is Equity Share Capital? – Quick Summary
- Equity share capital is the funds a company raises by issuing shares to the public, representing the ownership interests of shareholders.
- Equity Share Capital is the core funding of a company obtained by selling shares. Shareholders gain dividends, voting rights, and a stake in the company. It’s vital for the company’s growth and financial health.
- Equity Share Capital examples include XYZ Ltd. issuing 1 lakh shares at ₹10 each, raising ₹10 lakh. Shareholders get ownership rights and dividends.
- The formula to Calculate Equity Share Capital is Total Issued Shares x Par Value per Share. It shows the total value of issued shares.
- Types of Equity Share Capital includes Authorised, Issued, Subscribed, Right, Sweat Equity, Paid-up, and Bonus Shares, each with specific roles in the company’s capital structure.
- The main advantage of equity shares is the potential for high returns, while the key drawback is higher market volatility and risk of capital loss.
- The main difference between equity and share capital is that equity represents the total ownership value in a company, while share capital refers specifically to funds raised through issuing shares.
- Invest in equity share capital of the companies for free with Alice Blue.
Equity Share Capital Meaning – FAQs
What Is The Meaning Of Equity Share Capital?
Equity share capital refers to the amount of funds a company raises by selling shares to investors. This capital forms the foundation upon which a company builds its financial structure, giving shareholders an ownership stake and typically voting rights.
What is the difference between equity capital and share capital?
The main difference between equity capital and share capital is that equity capital includes share capital plus retained earnings and reserves, representing the total value of shareholders’ stakes. Share capital is the actual funds raised by issuing shares.
What are types of equity shares?
Types of equity shares comprise ordinary shares, offering voting rights and dividends; preference shares, granting fixed dividends and asset distribution priority; cumulative preference shares, accumulating unpaid dividends; non-cumulative preference shares, not accruing dividends; and redeemable shares, which the company can buy back.
How do you calculate equity share capital?
Equity share capital is calculated by multiplying the number of issued shares by the par value of each share. For example, if a company issues 100,000 shares with a par value of ₹10, the equity share capital is ₹1,000,000.
Is equity share capital an asset?
Equity share capital is not considered an individual asset; it is the money shareholders invest and is recorded in the equity section of a company’s balance sheet, representing the owners’ claims on the company’s assets.
What are the advantages of equity share?
The main advantage of equity shares is the opportunity for capital growth. Shareholders can benefit from increases in share price and potential dividend payments, which can offer higher returns than other investment forms.
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