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.
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.