Sources of Business Finance — OCM STD 11 Commerce — Question
Gujarat BoardEnglish MediumSTD 11 CommerceOCMSources of Business Finance5 Marks
Question
Define share and explain the charactristics of equity share.
✓
Answer
Equity shares:
An equity share, commonly known as ordinary share represents the fractional or part ownership of the person i.e. share-holder in the company. Equity shares have ‘ the right to obtain dividend (i.e. earn income) as per company’s laws and right to claim repayment of share value after the company has made all its payments. After paying all the business expenses, taxes, etc. the company may earn profit. The equity share-holders have a right to claim a share in this profit. The company based on its policy may distribute a part of residual income in the form of dividends to the share-holders. The equity share-holders have a right to claim this dividend.A company can invite people to buy its shares. The share-holders become part owners and the company gets its capital.
Characteristics of equity shares:
$1.$ True owners:
Owners of equity shares i.e. equity share-holders are considered as true owners of the company or faithful companions because they take much higher risk on their head by investing in equity shares as compared to preference share-holders.
$2.$ Kight to vote:
Equity share holders have right to vote for electing directors of the company. One share is equal to one vote. Thus, higher the number of shares held, higher the votes one can cast.
$3.$ Dividend:
Whether to distribute the dividend or not and how much to distribute depends upon the company.
$4.$ Dividend is based on profit:
The dividend a share-holder gets depends on the profit a company makes.
A company earning higher profit may distribute higher dividend and that making lesser profit or loss may distribute lesser dividend or may not distribute at all.
$5.$ General meeting:
Share-holders have the right to attend general meetings and also have right to vote and elect the directors.
$6.$ Repayment of capital:
Share capital is not repaid to the share-holders as long as the company exists. If the company winds up it returns the share capital after paying off all its business debts.
$7.$ Dissolution (Liquidation):
At the time of liquidation the company first pays off capital of preference share¬holders and all other business debts and then if it has money, it pays to equity share-holders.
$8.$ Share qualification:
If there is a provision in the memorandum and directors have given consent that if a particular person holds a specific number of shares decided by the company then he can become the director of the company then the shares are considered as share qualification.
$9.$ Capital benefits:
Share-holders get various capital benefits by owning the shares. They earn dividend, company may also give them bonus shares, they earn by selling the shares whose prices have increased, etc.
$10.$ Registration of shares:
Equity shares are registered in recognized share markets or say stock exchange. Investors can buy/sell the shares in these markets freely.
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