Share Capital –
It means that if the shareholder is 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 Shares:
1. Source of fixed capital –
Share capital is the source of fixed capital. There is no compulsion of paying a dividend to equity shareholders.
2. High Credit level –
The credit of the company is decided through its entire share capital.
3. No burden on Company –
There is no compulsion of dividend to be paid to equity shareholders, therefore there is no burden on the company.
4. Suitable for risk-taking Investors –
This is the best option for those investors who are willing to take more risk and want to earn more profit.
5. High Funds –
Equity share capital helps in the funding of more capital, and in that case, personal property can be kept as security.
Demerits of Equity Shares:
1. No Regular Income –
There is the uncertainty of dividends as well as their amount.
2. High Cost –
As the return on these shares is not regular and guaranteed, so their holders have to bear a high risk of returns.
3. Lack of flexibility –
Equity shares are subject to speculation, that is, there can be frequent changes in their share price, causing capital loss also.
4. Legal Formalities –
Compliance of many legal formalities in issuing equity shares may cause a delay in getting funds.
