Equity Share - Financial Asset
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Equity share is a financial asset that persons can buy in exchange for cash. Common stock is another name used to describe equity shares. Companies established under the company law of a country issue equity shares through a prospectus, which is specified by the company law provisions of the country. The condition of prospectus is applicable to companies which want to provide trading facility for the equity shares issued by them on the recognized stock exchanges. Such companies, whose shares are traded on the stock exchange are termed 'listed companies.' To get a company's shares listed on a stock exchange, the company has to approach the stock exchange and comply with certain provisions put forward by the stock exchange. These provisions are insisted by stock exchanges so that public at large have information about the working of company and also to facilitate quick transfer of the equity shares from seller to the buyer.
Companies issue equity shares to finance the working of the company. Finance means the money resources of a company. Companies generally accumulate money resources first and then convert these money resources into tangible and intangible assets of the company. Tangible assets are the physical buildings and machinery in the company ownership and intangible assets are the investments or expenditures made to build awareness and trust in the market. Companies also acquire money resources for running the company through bank loans and fixed income securities. Bank loans and fixed income securities have a specified interest which is to be paid periodically on specified dates and it is obligatory for the company to pay that interest. If there is a default, the creditors who gave loans or bought securities can go to court and ask for liquidation of the company to pay their dues. In such cases, court will interfere in the operations of the company, seek information from the company and also give directions to the company and even order liquidation. In contrast, on equity share, there is no contractual periodical obligation to pay a return. The companies prepare profit and loss account for every financial year according to generally accepted accounting principles of the country as well as certain guidelines given under the company law of the country. If the profit and loss account reports profit, the board of directors, have to decide the amount of profit that they would like to distribute as return to the shareholders. The profit distributed on equity shares to shareholders is termed dividend. In the years, when the company reports loss in the profit and loss account, the board of directors may declared if there are retained profits from earlier years. Otherwise, they can't distribute any dividend and shareholders will not receive any return in that year. Thus return on equity shares is variable from year to year. One can only estimate future dividends based on past performance of the company and plans and prospects but there is no contractual agreement anywhere for payment of a specified amount.
Equity shares comes into existence when a company issues them to public and they are traded on stock exchanges of a country, if they are listed for trading on them. Persons with savings can buy them from companies when companies make an issue of equity share or they can buy them from existing shareholders on stock exchange. The return on equity shares is in the form of dividends. As the companies as a practice do not distribute the entire profit as dividends, and retain some profit with them to support their business further, shares appreciate in value. The appreciation in value of shares is also a return to shareholders. If the companies make losses, the retained profits will reduce and therefore shares can lose value also. Therefore return on equity shares is variable from year to year, and they are aptly called variable return securities or risk securities. Return on government bills, notes, and bonds is called risk free return and they are called risk free securities. On risky securities, there is promise and expectation of higher return compared to risk-free securities and there is an increase in variability of realized return.
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