Equity Shares

Can you think of leading our life without money, in these modern times? We need to invest money while taking major decisions; we need to spend money every day to carry on with our daily life. Just as we require investing money, spending money, organizations need to invest and spend money. Organizations need to invest money in long term projects as well as short term requirements and spend money for its everyday activities.

While Finance is providing money at the time when it is required, tapping the right source of finance is very important. We need to arrange finance for the long term finance from those who are willing to invest as owners and look for sharing profits or lend as creditors and wait for a long period to get repayment of the principal amount while interest is also paid periodically. Similarly Short term finance may be arranged from those who are willing to provide funds for a short period. Hence the finance provider may be an investor or a creditor.

Following are the important sources of funds:

• Issue of Equity shares
• Issue of Debentures
• Issue of Preference Shares
• Loans from Banks & Financial Institutions
• Deposits from public
• Ploughing back of profits
• Trade Credit
• Trade Advances
• Factoring
• Installment Credit

We shall discuss below the important securities involved while raising funds.

Issue of Equity Shares (also known as Ordinary or Common shares) is undertaken by a joint stock corporation for raising long term capital from the investors who are interested in the participation / sharing of the final profit or loss. Hence the funds raised through issue of equity shares are called Owners’ capital since the holders of these shares are the real owners.

Equity shares are the main source of finance of a firm. It is issued to the general public. Equity shareholders do not enjoy any preferential rights with regard to repayment of capital and dividend. They are entitled to residual income of the company, but they enjoy the right to control the affairs of the business and all the shareholders collectively are the owners of the company.

Equity Shares is a source of permanent capital and are not redeemed during the life time of the company. The equity shareholders are entitled for the dividend, rate of which is decided by the board of directors of the company. Hence it is known as Variable Income Security.