Equity Finance : Definition, Characteristics,Advantages & Disadvantages.

What is Equity Finance?

Equity Shares also known as ordinary shares. The shareholders of equity shares are the real owner of the company.They have the control over the management of the company and they are eligible to get dividend if the company earns profit. This is the permanent nature of capital, which has no maturity period and can not be be redeemed during the lifetime of the company.

Characteristics of Equity Finance

  • Equity Finance is the permanent capital of the company which has not maturity period.
  • Equity shareholders are entitled for dividends after paying dividend to Preference Shareholders.
  • If the Company wound up, the equity shareholders have the right to get the claims on assets.
  • They are the real owner of the company and have control over the management and related decision.
  • Equity shareholders have voting right in the meeting of the company with the help of voting right power.They can nominate proxy to participate and vote in the meeting instead of the shareholders.
  • Equity Shareholder have pre-emptive right. The pre-emptive right is the legal right of the existing shareholders. This gives the opportunity to the existing shareholders to additional equity shares in proportion to their current holding capacity.
  • Equity shareholders have only limited liability to the value of share they have purchased.
  • Company is not obliged to pay dividend mandatory.

Advantages of Equity Finance

Equity finance are very common and universally used shares to mobilize finance for the company. It consists of the following advantages:

  • Permanent finance which is long term in nature and used for long term of fixed capital requirement of the business concern.
  • Voting  rights: Equity  shareholders are the real owners  of the company who have voting rights.   This type of advantage is available only to the equity  shareholders.
  •  No fixed  dividend: Equity shareholders are not entitled for fixed rate of dividend. After the dividend to preference shareholders, they will get their portion. Based on profit and other considerable factors, dividend rate may change over the period.
  •   Less cost  of capital:  Cost of Capital (Ke) is lesser than other finance. 
  •   Retained  earnings: More Equity finance may provide more profits, and more profits give the opportunity to retain more earnings. Retained earning is the less cost sources finance compared to other finance.

Disadvantages of Equity Shares

  • Equity shares can not redeemed during the lifetime of the business
  • Tax benefit can not be obtained if finance funded from Equity Capital.
  • Shareholders may always expect a high dividend payout ratio that may hamper the growth of the company.
  • If additional shareholders participate in equity finance, the existing shareholders may loose the control of the company.
  • Conflict between directors are commonly observed while taking a important decisions.