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 The money raised by issue of equity shares is called equity share capital, while the

money raised by issue of preference shares is called preference share capital.
(a) Equity Shares

 Equity shares are the most important source of raising long term capital by a company.
 Equity shares represent the ownership of a company and thus the capital raised by issue

of such shares is known as ownership capital or owner’s funds.
 Equity share capital is a prerequisite to the creation of a company.

 Equity shareholders do not get a fixed dividend but are paid on the basis of earnings by

the company.
 They are referred to as ‘residual owners’ since they receive what is left after all other

claims on the company’s income and assets have been settled.

 They enjoy the reward as well as bear the risk of ownership.
 Their liability, however, is limited to the extent of capital contributed by them in the

company. Further, through their right to vote, these shareholders have a right to
participate in the management of the company.

Merits
(i) Equity shares are suitable for investors who are willing to assume risk for higher

returns;

(ii) Payment of dividend to the equity shareholders is not compulsory. Therefore, there is
no burden on the company in this respect;

(iii) Equity capital serves as permanent capital as it is to be repaid only at the time of
liquidation of a company. As it stands last in the list of claims, it provides a cushion

for creditors, in the event of winding up of a company;
(iv) Equity capital provides credit worthiness to the company and confidence to

prospective loan providers;

(v) Funds can be raised through equity issue without creating any charge on the assets of
the company. The assets of a company are, therefore, free to be mortgaged for the

purpose of borrowings, if the need be;
(vi) Democratic control over management of the company is assured due to voting rights

of equity shareholders.