Investing in equity shares has its advantages such as dividend income, control, etc. as well as its disadvantages such as market fluctuations, high risk, and others. This article explains the features, advantages, and disadvantages of investing in equity shares to enhance the investment decision of investors.
Equity shares also known as ordinary shares. An ordinary share is the most common type of shares and gives its owners the right to dividend and vote in the company annual general meeting. The value of equity shares stated in the statement of financial position in terms such as book value, face value, nominal or par value.
Characteristics of equity shares
The following are the features of equity shares:
- Voting right
- Increase shareholder’s wealth
- Transferable in secondary capital market
Equity shares give the shareholders the right to vote in deciding the management of the company.
Increase shareholder’s wealth
Equity shares increase the wealth of shareholders through the profit generated by the company during the accounting year.
Transferable in secondary capital market
Equity holders can transfer it to another person in the secondary capital marketing when the existing shareholders sell part or whole shares to another person.
Advantages of equity shares
The benefits of investing in equity shares include the following:
- Dividend Income
- Capital Gain
- Control of the Company
- Right on the Assets and Income of the Company
- Bonus Shares
- Right Shares
- Stock Split
- Tax Advantages
One of the two main sources of returns on investing in equity shares is the dividend. This investment gives the investors the right to receive the dividend from the company when the company declares a dividend.
Another source of return on this investment is capital gain. Capital gain is the gain that arises as a result of an increase in the market price or value of the company’s shares. This occurs as a result of the appreciation of the market value of the company.
Control of the Company
It gives the investors the right to the ownership of the company and therefore exercise the control of the company through voting right.
Right on the Assets and Income of the Company
The right to the ownership of a company gives the right to own the assets of the company and also take part in sharing the profit of the company through dividends.
Existing shareholders of a company can issue new shares free of charge through bonus issues. A bonus issue is a situation when a company issues new shares to the existing company free of charge using the company’s retained earnings.
It gives the existing shareholders the right to get new shares at the price lower than the market price of the shares whenever the company issues the right issue (right shares)
Stock split is another advantage of investing in equity shares. A stock split is a situation when a company split its shares into parts by reducing per share price and increasing the number of shares. By doing this, it increases the liquidity of the shares as well as increases the interest of investors in the company.
Investing in the shares of a company listed on the stock exchange market enhances the liquidity of the shares. It gives the investors the option of converting the shares to cash anytime during the market session by selling or transfers the ownership of the shares to another person.
In Nigeria, the capital gain that arises from the disposal of stock or shares of any description is
exempted from capital gain tax (From 1998).
Disadvantages of Equity Shares
The following are the disadvantages:
- Variable and uncontrollable dividend
- High risk
- Market fluctuation
- Residual right
Variable and uncontrollable dividend
The dividend to receive by investors is not fixed and cannot be controlled by the shareholders. The management determines the amount to pay as a dividend and the payment of dividend depends on whether the company makes profit or loss.
The investment is a high-risk investment when compare with other investment options like debenture because it is not back up with any collateral security.
The market price of the shares is very volatile due to the high fluctuation of share markets. Therefore, there are equal tendencies of making losses in the market.
The investors in equity shares rank last in the distribution of income as well as in the distribution of assets of the company in the time of liquidation. The payment of dividends to the equity shareholders is made after the payment of others like debenture holders and preference shareholders. Also, in the time of liquidation equity shareholders settle after others have been settled.
Afeez is one of the founding partners of Marasas Consulting limited. He consults for both individuals and entities in the area of accounting, management, audit, tax, and investment. He has a wide range of experience both online and offline which allows him to provide relevant and timely professional advice and assistance to business owners with their accounting, tax, management, audit, and investment plans.
Afeez is a member of the Institute of Chartered Accountants of Nigeria (ICAN) and a member of the Nigerian Institute of Management (Chartered). He is a certified Google analyst and strategist. He earned his Bachelor degree in Management and Accounting from Obafemi Awolowo University, Ile-Ife, Nigeria, and earned an ordinary national diploma in Accountancy from The Polytechnic of Ibadan, Oyo State, Nigeria. He earned certification in “Excel Crash Course” and “Reading of Financial Statement” from Corporate Finance Institute, Canada.
Afeez is dedicated to helping clients achieve business success by helping them to establish solid and sound accounting, tax, and financial processes.