The benefits of Investing in Equity Shares to Investors

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

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

Voting Right

Equity shares give the shareholders the right to vote in deciding the management of the company.

Read Also: Understanding The Similarities and Differences Between Shares and Debentures.

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:

  1. Dividend Income
  2. Capital Gain
  3. Control of the Company
  4. Right on the Assets and Income of the Company
  5. Bonus Shares
  6. Right Shares
  7. Stock Split
  8. Liquidity
  9. Tax Advantages

Dividend Income

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.

Capital Gain

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.

Bonus Shares

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.

Right Shares

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

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.

Liquidity

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.

Tax Advantages

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).

Read Also: Nigeria Tax Laws : The Effect on Small Business

Disadvantages of Equity Shares

The following are the disadvantages:

  1. Variable and uncontrollable dividend
  2. High risk
  3. Market fluctuation
  4. 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.

High Risk

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.

Market Fluctuation

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.

Residual Right

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.

Related Articles

6 Possible Ways to Invest Your Money in 2021

The Benefits of Debentures to Investors and Companies

The Similarities and Differences Between Shares and Debentures

7 thoughts on “The benefits of Investing in Equity Shares to Investors

  1. Pingback: Advantage and Disadvantages of Debentures to both Investors and Companies -
  2. Pingback: 6 Possible Ways To Invest Your Money in 2021 -
  3. Pingback: How to Invest in Real Property. - 5 Ways to Get Started
  4. Pingback: The Similarities and Differences Between Shares and Debentures -
  5. Pingback: 6 Strategies to Measure and Manage Investment Risk of Portfolio -
  6. Pingback: 5 Possible Ways to Invest in Real Property - 5 Ways to Get Started
  7. Pingback: Money Market Fund: The 4 Benefits of Money Market to the Investors -

Leave a Reply

Your email address will not be published.