Equity Share Capital

Equity share capital is the most basic and, for most companies, the largest single source of owned, long-term finance, and this chapter of the AP Intermediate Commerce course examines it in detail as the starting point of company finance.

An equity share (also called an ordinary share) represents a unit of ownership in a company. A person who buys equity shares becomes a shareholder and part-owner of the company, entitled to vote at general meetings on important matters such as the election of directors, and entitled to receive dividend only after the claims of preference shareholders and creditors have been met. Equity shareholders do not get a fixed rate of dividend; the rate depends on how much profit the company earns and how much of it the board decides to distribute in a given year, so equity shareholders bear the highest degree of risk among a company's capital providers, but they also stand to gain the most when the company performs exceptionally well, since there is no upper limit on the dividend they can potentially receive.

Equity share capital offers several merits to the company that issues it. It does not create any fixed burden, since dividend is paid only if the company earns adequate profit and the board decides to declare it; unlike interest on a loan, there is no legal compulsion to pay a dividend even in a year of losses. It is a permanent source of capital that need not be repaid during the company's life, and it improves the company's borrowing capacity and creditworthiness, since a larger equity base gives lenders more confidence that their money is safe. Equity capital also gives shareholders a democratic say in how the company is run, through their voting rights. …