Equity and Equity Capital
Stock market is an investment opportunity that can offer both high risks and high returns. Capital is the money required to run a business. When a business wishes to expand or commercialize a new product or service, it needs to raise capital.
Capital can be raised in 2 ways -
- Debt: This is the borrowed capital
- Equity: This is the company’s own capital
Equity capital represents ownership capital. Equity shareholders collectively own the company. They bear the risk and enjoy the rewards of ownership. The potential rewards and the downsides of equity shares make this an exciting, attractive and at the same time a risky proposition for investment.
In financial markets, the stock capital or equity capital of a corporation or a joint stock company is the capital raised through the issuance, sale, and distribution of shares. A person or organization that holds at least a partial share of stock is called a shareholder.
Types of Share Capital
The share capital or stock capital exists in 2 forms:
- Ordinary Shares: Ordinary shares or Common stock is the most usual and commonly held form of stock in a company. Common stock holders typically have voting rights in corporate decision matters. In order of priority for receipt of their investment in the event of liquidation of a corporation, the owners of common stock are the last.
- Preferred Shares: These have priority over common stock in the distribution of dividends and assets. Most preferred shares do not provide voting rights in corporate decision matters. However, some preferred shares have special voting rights to approve certain extraordinary events such as the issuance of new shares, the approval of the acquisition of the company, or to elect directors.
Classification of equity shares
- Blue chip shares: Shares of large, well established companies with an impressive track record
- Growth shares: Shares of companies with fairly entrenched position in a growing market with higher profitability and growing market share than the average
- Income shares: Shares of companies with fairly stable operations, relatively limited growth opportunities and high dividend payouts.
- Speculative shares: Shares that tend to fluctuate widely as there is a lot of speculative trading between them
Equity Market
Equity market is a place where a company can raise its fund and give an opportunity to investors to invest in the companies listed on the market. Segments of the equity market are:
- Primary Market
- Secondary market
Primary Market
It is also called the new issues market where in a company can raise fresh capital for its use. It is the market in which investors have the first opportunity to buy a newly issued security directly through the company. All IPOs [Initial Public offerings] come under primary market.
Some of the objectives of an IPO are:
- To promote a new company
- To expand an existing business
- To diversify production
- To meet regular working capital requirements
There are 4 ways in which a company may raise equity capital in primary market:
- Public issue: A public issue involves sale of securities to public at large. In India, IPOs are offered through the fixed price process or the book building process or a combination of both. Public issues in India are governed by the provisions of the Company’s Act, 1956.
- Rights issue: A right issue is offered by a company that is listed on a stock exchange. The listed company issues fresh securities to its existing shareholders on a particular date. These issues are offered in a particular ratio, in proportion to the number o f securities held, prior to the issue date. This method is followed when companies want o raise capital without diluting the stake of their existing shareholders.
- Private Placement: This involves sale of securities to a limited number of investors such as financial institutions, mutual funds, venture capital funds, and banks. The identity of the investors is not known when the offer document is prepared.
- Preferential Allotment: This involves the issue of shares to financial institutions, mutual funds, ventures and banks. However, in this case, the identity of the investors is known when the issuing company seeks approval of its shareholders.
Secondary Market
Secondary market facilitates trading of securities after these securities are initially offered to the public in the primary market and/or listed on a stock exchange. A huge volume of trading takes place in the secondary market. This market is also known as the stock market.
Various participants in the secondary market are:
- Institutional investors -
- Mutual funds
- High net worth investors
- Large broking houses
- Foreign institutional investors
- Retail investors
Also read:
|
