Advantages and Disadvantages of Equity Shares

An equity share capital is the company’s asset as it is the investment made by the owners or the company. The owners of equity shares enjoy several benefits and bear some risks of their own in the business. The ordinary owners of equity shares are also considered the owners of the company. They are all entitled to get dividends on the earned and shareable profit. The company raises its funds by issuing equity shares and using them to buy assets and increase productivity to earn higher profits. Therefore, equity shareholders can earn a high level of profit or dividend. However, they paid after paying debts and satisfying the rights of the preference shareholders. 

Generally, the BOD of the company suggests the rate of dividend for the concerning year. And the suggested or inspired by the suggested rate of dividend declared by the company’s shareholders in the AGM or Annual General Meeting. The equity shareholders carry the right to vote in the general meetings when the resolution passes. However, there are many advantages and disadvantages of investing in equity shares of the company. In this article, we will discuss some of the significant pros and cons of equity shares.

Advantages and Disadvantages of Equity Shares

Advantages of Equity Shares 

Get Dividend

The investor of equity shares is entitled to get a dividend from the profit remaining after paying the preference shares and debts. And the dividend is one of the primary sources from where the equity shareholders earn profit from their investment. As per the profitability, the equity shareholders are real gainers because they earn increased dividends almost every year and take advantage of the increased value of their holding shares.  

Enjoy Capital Gains

The equity shareholders also enjoy capital gains as it is a significant ROI source for their investment. And these gains happen when the prices of equity get increased in the stock market. Hence, if you also want to enjoy the capital gains, you can prefer equity shares as the ROI from capital gains can be multiple. 

Equity is Liquid 

The equity shares of a listed company in the stock exchange have high liquidity. They can be used to transfer the ownership of the shares quickly. Thus, whenever the owner of the equity shares thinks he can transfer some of his holdings to earn some good profit, he can do it quickly.  

Get Some Bonus Shares

Sometimes a company decides to issue some bonus shares for their existing equity shareholders. The bonus shares are also a kind of dividend where the equity holders get some free shares. And these shares also offer the same features as the existing equity shares offer. Therefore, if you become the equity shareholder in the company and get some bonus shares, you will be able to maximize your earnings from dividends and capital gains. 

Avail Benefit of Stock Split 

The equity shares can also be split and are known as a stock split. It also benefits the equity shareholder because it reduces their share prices and splits them into pieces. Then the price per share gets reduced and which increases the readability of that equity. And the higher number of shares with low price increases the liquidity of the share. Hence shareholders earn profit by selling some portion of their holdings.  

Have The Option of Right Shares

Whenever a company thinks fit to increase the capital or think for capital expansion, they issue the right shares. Right shares are the shares that are preserved for the existing equity shareholders. And they can buy those shares at a less low price than the current market price. They can also recommend those shares to the other investor they may think fit or can benefit from this offering by themselves.  

Disadvantages of Equity Shares 

Dividends Fluctuate From Time To Time

The dividend received by the equity shareholders is not fixed, and it can be less, more, or zero in some years. If the investor has the equity, then the company pays to him after settling the payment of debtors and preference shareholders. And if there is a remaining balance only, then the company is liable to pay its equity investors. Therefore, there is no stable income if the market scenarios are not good. The company needs to adapt some latest technology. 

A Bit Risky Investment Option

Equities are a hazardous investment option because they are considered the owner of the company. And the owner of the equity shares can earn the profit as the dividend if the profit amount remains after paying debts. Also, there is no collateral security; therefore, if the company cannot pay the dividend, the equity shareowners are not entitled to claim their ROI.

Ideally Lower Control

Generally, the company issues lakhs of equity shares in the stock market. It is a small investor or shareholder of the company. Then you will probably have limited control because there are big fish. Those who already keep a significant percentage of equity shares dominate in the annual general meetings. Therefore, the small investor’s voting right may not have any significant impact on the decision. 

The Market Price of The Share Can Up & Down

The prices of the shares fluctuate every single day, depending upon various internal and external factors. The prices of the shares often go down, and it becomes harder to sell existing equity for profit. Thus, if you are buying equity shares, you need to know this aspect because dealing with equity contains 50% loss and 50% profit trading scenarios.  

It Cannot Be Redeemed Until The End of The Life of The Company

Another disadvantage of equity shares is that the investor can not redeem their holdings in cash. They can only transfer for the profit in the share market but can not redeem from the company. And the company is created to earn profit till infinite years. Therefore there is very little chance to claim the equity holding from the company. 

Conclusion

In this article, we learned the advantages and disadvantages of equity shares in the share market. I hope now everything is clear and you have learned what you wanted to learn from this post. Equity shareholders are one of the attractive parts of the Indian share market and still a valuable investment option. It is risky but also offers multiple times the rate of returns when the market scenarios stay normal.

If you want to invest in the share market, especially in equity shares. Then first, you need to focus on the advantages and disadvantages of these shares. Once you decide to buy such shares, you can choose the best-performing company and get such shares from that listed company. In the short term, you can expect dividends from the company and earn some cash when it winds up.

Leave a Comment

Your email address will not be published.