Advantages and Disadvantages of Equity Shares
The important advantages of raising funds through issuing equity shares are given as below:
- Equity shares are suitable for investors who are willing to assume risk for higher returns;
- Equity shares do not create any obligation to pay a fixed rate of dividend.
- Payment of dividend to the equity shareholders is not compulsory. Therefore, there is no burden on the company in this respect;
- Equity capital serves as permanent capital as it is to be repaid only at the time of liquidation of a company. As it stands last in the list of claims, it provides a cushion for creditors, in the event of winding up of a company;
- It is a permanent source of capital and the company has to repay it except under liquidation.
- Equity capital provides creditworthiness to the company and confidence to prospective loan providers;
- In case of profits, equity shareholders are the real gainers by way of increased dividends and appreciation in the value of shares.
- Democratic control over management of the company is assured due to voting rights of equity shareholders.
Disadvantages
The major disadvantages of raising funds through issue of equity shares are as follows:
- Investors who want steady income may not prefer equity shares as equity shares get fluctuating returns;
- As equity capital cannot be redeemed, there is a danger of over capitalization.
- The cost of equity shares is generally more as compared to the cost of raising funds through other sources;
- Equity shareholders can put obstacles for management by manipulation and organizing themselves.
- Issue of additional equity shares dilutes the voting power, and earnings of existing equity shareholders;
- More formalities and procedural delays are involved while raising funds through issue of equity share.
- Investors who desire to invest in safe securities with a fixed income have no attraction for such shares.
