It is a matter of great pride to own a business and conduct it in the way you deem fit, but some business policies are to be followed so that you can function smoothly. One such policy is equity sharing.
What is equity sharing?
Equity sharing is the principal source of finance for any business. Earlier known as ordinary shares, the shareholders are the real owners of the company. They have voting rights and are part of the decision making process in the firm. Although, it sounds like they have more power and say in the way things run, at the time of dividend payments, equity shareholders get preference after the other preferred shareholders have been given their share. They also take more risks as compared to other shareholders in the company. Equity shareholders are the main risk takers for a company. They pay high dividends and are unsure of the return of the principal capital, which cannot be claimed during the course of the company’s life time. Equity shareholders are necessary for a business, so that the burden of capital generation can be shared.
Equity of the Owner: Owner’s equity basically means the total equity cost which an owner has in his own company. To site an example, if a business’ total asset is INR 1 lakh and INR 80,000 comes from shares, then INR 20,000 is the owner’s equity amount. Big multinationals which are owned by shareholders, refer to these owners as shareholder’s equity. In simple terms owner’s equity is the amount the owner has left for himself after all the creditors have been paid.
Finances: Equity shares help one understand the true weightage of a business. Since expansion is the aim for any successful businesses, companies sharing equities are able to do so, by selling company stocks periodically. This way they can avoid the risk of taking huge loans from finance companies/banks.
Negative Equity: This is an unfortunate side effect of the equity market. When the amount of mortgage becomes more than the actual value, negative equity comes into play. For e.g. A business decides to purchase new technology for INR 1 lakh and takes out INR 80,000 of equity shares. Negative equity occurs, when the cost of the product suddenly falls to INR 40,000 and there is excess equity to account for. Businesses that face this, unfortunately have big debts and take some time to change debt payment to high profits.
What are the advantages of equity market for a business?
- Equity capital is owned by the company throughout its life time and returned if and only the business winds up.
- Equity shareholders can appoint the management of the company
- The dividend or return is fund dependent. Depending on the surplus available, the dividend is decided and repaid.
- Equity shares can be released without disturbing the assets of the company.
Equity trading in India: This is a huge market in India. Managed by the NSE and BSE, it is where sellers and buyers can make the trade. There are many layers to this kind of trading, like primary trading, secondary trading, intraday trading, positional trading, etc. These offer different kinds of policies so be sure to read up before you make a decision.
Founders Shares: As the name suggests, these shares are the ones owned by the very founders of a business. Dividends for these are cleared after all other shareholders get paid. Founder’s shares are generally smaller amounts, a gesture to keep their voting rights. They are the main backbone of the company, who keep the cogs running and generating more business.
Analysis: It is essential to consult an expert who will study and determine the value of your business. Even though equity sharing dilutes ownership, it is the ideal way to stay afloat without incurring too many debts. Even shareholders do not expect returns as capital, but growth and better stock options. As a business this is the ideal buffer from major capital investments and loans and as an investor, you can enjoy the benefits of owning a business, without engaging in the daily work. Plunge into the equity market once you understand the risks involved, but a good solid investment fetches great returns in the long run. As they say, sharing is caring!