India is a country with plenty of investment opportunities and the stock market controlling the equity shares trading plays a major role in the whole scenario. The stability of the Indian financial market has further motivated more and more investors to channelize their money into equity shares in an expectancy of great profits. However, it is imperative to make a note of the advantages and disadvantages of equity shares before investing your hard-earned money in them. However, there are two perspectives of looking at the shares, one from the Company point of view and the other from the Investor point of view.
The following section enlists some of the advantages and disadvantages of equity shares.
The Pros Of Equity Shares
The following are some of the advantages of equity shares:
- If an investor invests in the equity shares of a certain company, he is entitled to get two types of returns on his investment. The first return is the dividend which the investor receives from the company.
- The second return on his investment is the Capital Gain which solely depends on the performance of the company. If the company has performed well, the stock prices would rise and the capital gains of the investor would be high and vice versa.
- An investment in the equity shares of the company makes the investor an owner and this gives him the voting rights in the company and he can exercise his control in it.
- In case the company is in need of more funds, rights shares are issued which prioritize the existing shareholders and investors over the other general investors.
- The shares of the companies listed under the stock exchange have the advantage of liquidity which allows the easy transfer of ownership of the shares.
- Equity shares are issued without any sort of charges on the existing assets of the company which is a great benefit from the company’s point of view.
- The companies often give away free shares or bonus shares to its existing shareholders which is nothing but a type of dividend.
- Stock Split is one of the greatest advantages of the equity shares. This allows the splitting of a share into several parts. This in turn increases the readability of the share and ultimately results in high liquidity and volume of the shares.
- The investor owns the assets of the company and hence gets his share of profit when the company does some income.
- The liability of the investors are limited up to the investments made by them. This implies that if the company makes any loss, the loss share is limited to the investment only.
THE CONS OF EQUITY SHARES
The following are some of the disadvantages of the equity shares:
- The investor does not have any control over the dividend which is decided by the company itself.
- The prices of the equity shares operate within a wide variation range which makes it difficult to earn profits since there are equal chances of loss making.
- The power and control of the investors are limited since the shareholders are not organised.
- As compared to other investments, investment in equity shares possess a higher magnitude of risk since the investment is made depending on the faith of the investor on the company.
- The issue of newer shares reduces the share values of the existing investors.
- When seen from the company point of view, payment of dividends to the investors does not come under the tax-deductible expenditures of the company.
- For issuing of equity shares, the company needs to pay the highest additional expenses including brokerage expenses etc. which sums up to be higher as compared to other finance sources.
- The cost of equity is also the highest among all the alternative financing sources.
- The income which the shareholders get is the amount which is available on hand after paying all the stakeholders of the firm.
- The company gradually dilutes the default ownership by selling the equity shares which might lead to complete loss of control over the time.