What is Equity Capital?

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Saurabh Guptahttp://karekaise.in
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What is Equity Capital?


Companies need funding to grow their business and this funding is also called capital . When a company collects capital from investors by selling its shares, it is called ‘equity capital’.

Usually equity capital is also called share capital or residential capital. In the company’s balance sheet, it is shown in the section on shareholder funds.

Most of the equity capital is collected from investors in the initial phase of any business, hence it is the main funding of the business.

You will know that any business collects money for funding in two ways

  • through debt financing.
  • through equity.

In debt funding, banks or other financial institutions provide funding on which the company has to pay interest, whereas in equity, the company sells its shares to the equity market people, in return for which investors invest money in the company.

Why is Equity Capital Risky?


To understand why equity capital is risky, first you need to understand its definition, according to which-

Equity Capital is the amount that will be returned to the shareholder when all the assets of the company are liquidated and the liabilities and all outstanding debts are paid by the company

Asset being liquidated means that when the company is closed i.e. becomes bankrupt, then all the assets of the company are sold one by one by the people whose money or bank’s money is invested in the company. This is called asset liquidation.

In Asset Liquidation, by selling the asset, all the debts owed to the company are first repaid, after which their money is returned to the prepared share holders, then after that the remaining money is distributed among the equity share holders.

This means that those who have invested equity capital in the company, they get the money later in the event of bankruptcy of the company and many times they do not get the money because all the assets of the company come to the equity share holder. Would have been auctioned.

That’s why equity capital is considered the most risky because if the company sinks, the money is returned to the equity investors later.

This is because the first responsibility of the company is to return the money to its creditors i.e. debtors.

But now the question comes that when there is so much risk in equity capital then why do investors invest money in equity?

Why do investors invest money in equity shares despite the risk in equity capital?


There are 3 reasons for this-

Ownership:

The investor who invests money in equity gets a stake in the company and if you have enough equity shares then you get Voting Rights to choose the directors of the company. Whereas if you invest in bonds or debt funds, you do not get ownership.

Dividend:

If you invest in equity shares for a long period, you get dividend every year on your capital. Dividend is the money that the company gives to its shareholders as a bonus every year out of its net profit.

Share price growth:

As the business of the company grows and the company earns profit, then its share price also starts increasing. Equity shareholders benefit the most from the increase in share price as most of the shareholders make money from the increase in cable share price which includes promoters, institutional investors and retail investors. Most of their focus is on the price of the stock.

 

So now you must have understood that even though there is risk in equity capital but still equity share holders invest their money in it as they get benefits like control over business, dividend and share price growth which they do not get in any other investment. .

WHAT DID YOU LEARN TODAY


I hope you have liked my article on What is Equity CapitalIt has always been my endeavor to provide complete information about the future of stock market to the readers, so that they do not have to search any other sites or internet in the context of that article.

This will also save their time and they will also get all the information in one place. If you have any doubts about this article or you want that there should be some improvement in it, then you can write comments below for this. this is only for educational purpose.

 

 

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