If the shareholders are not entitled to a fixed dividend in preference to others or if there is no prior right for the capital to be repaid, the share capital will be treated as equity share capital.
Merits of Equity shareholders:
- No compulsory dividend is required to be paid to equity shareholders.
- Equity capital is a permanent source in business
- Equity shares are issued without any security or charge on assets, thus assets are free and can be pledged to raise funds from long term borrowings.
- Voting rights of equity shareholders facilitate democratic control and management of company matters.
- These shares can be easily traded in the capital market.
Demerits of Equity shares:
- They do not provide regular income.
- The holders have to bear a high risk of returns.
- There can be frequent changes in their share price, causing capital loss also.
- Compliance of so many legal formalities in issuing equity shares may cause a delay in getting funds.
