Benefits and Disadvantages of Equity Shares Investment
Benefits of equity share investment are dividend entitlement, capital gains, limited liability, control, claim over income and assets, right shares, bonus shares, liquidity etc. Disadvantages are dividend uncertainty, high risk, fluctuation in market price, limited control, residual claim etc.
Equity share is looked at from different perspectives by different stakeholders. Broadly, there are two major angles of looking at it – Company and Investor Angle. So, any statement about equity capital would have different meaning for a company and an investor. We will look at the investor angle of equity share investment.
Benefits of Equity Share Investment:
Dividend: An investor is entitled to receive dividend from the company. It is one of the two main sources of return on his investment.
Capital Gain: The other source of return on investment apart from dividend is the capital gains. Gains which arise due to rise in market price of the share.
Limited liability: Liability of shareholder or investor is limited to the extent of the investment made. If the company goes into losses, share of loss over and above the capital investment would not be borne by the investor.
Exercise control: By investing in the company, the shareholder gets ownership in the company and thereby he can exercise control. In official terms, he gets voting rights in the company.
Claim over Assets and Income: An investor of equity share is the owner of the company and so is the owner of the assets of that company. He enjoys share in the incomes of the company. He will receive some part of that income in cash in the form of dividend and remaining capital is reinvested in the company.
Rights Shares: Whenever companies require further capital for expansion etc, they tend to issue ‘rights shares’. By issuing such shares, ownership and control of existing shareholders is preserved and the investor receives investment priority over other general investors.
Liquidity: The shares of the company which are listed on stock exchanges have benefit of any time liquidity. The shares can very easily transfer ownership.
Stock Split: Stock split means splitting a share into parts. How should an investor be benefited by this? By splitting of share, the per-share price reduces in the market which eventually increases the tradability of share. At the end, stock split results in higher volumes with more number of investors leading to high liquidity of the share.
Disadvantages of Equity Share Investment:
Dividend: The dividend which a shareholder receives is neither fixed nor controllable by him. The management of the company decides how much dividend should be given.
High Risk: Equity share investment is a risky share compared to any other investment like debts etc. The money is invested based on the faith an investor has in the company. There is no collateral security attached with it.
Fluctuation in Market Price: The market price of any equity share has a wide variation. It is always very difficult to book profits from the market. On the contrary, there are equal chances of losses.
Limited Control: An equity investor is a small investor of the company therefore it is hardly possible to impact decision of the company using the voting rights.
Residual Claim: An equity shareholder has a residual claim over both the assets and the income. Income which is available to equity shareholders is after the payment of all other stakeholders’ viz. debenture holders etc.