What are equity stocks?
Equity stocks are one of several types of stocks. They serve as a source of long-term capital for companies. In exchange for this capital, the companies issue equity stocks that investors purchase at an already determined price known as the par value. The investors on the other hand gain ownership in the issuing company, have a claim on distributions and assets, and can vote in operational matters of the company.
Equity stocks are known to be a long-term source of capital for companies because they generally have no maturity date; meaning they exist for as long as the issuing company exists. This additionally makes them an attractive investment option for investors.
We shall discuss the types and characteristics of equity stocks. We shall further look at their advantages and disadvantages both to the issuing companies and to the investors.
Types of equity shares
- Authorized stock.
- Issued stock.
- Subscribed stocks.
- Right share.
- Bonus shares.
- Sweat equity shares.
Authorized stock is the maximum number of both common and preferred shares that a company can issue. This maximum number is usually prescribed by the issuing company’s charter or can be legally determined by the rules and regulations guiding the issuing of shares by companies as issued by the country in which the company is established. Countries such as Australia and the United Kingdom do not have the maximum number of shares that a company can issue. Authorized stock is also called authorized shares.
The mathematical expression for the authorized stock is; Authorized stock = Issued shares + Unissued shares.
Issued stock refers to the total number of authorized stocks that the issuing company has made available for purchase by investors. It is a sum of all outstanding and treasury shares. Outstanding shares are all issued shares that have been purchased and held by shareholders. Treasury shares are previously issued shares that have been bought back by the issuing company; these shares typically are no longer entitled to dividends and have no voting rights. Issued stock is also known as issued shares. The issued share capital comprises funds that the issuing company realizes from the sale of the issued stocks.
The mathematical expression for the issued stock is; Issued stock = Outstanding shares + Treasury shares
Subscribed stocks are stocks that banks and institutional investors have promised to purchase before the initial public offering (IPO) of these stocks by its issuing company. These banks and institutional investors are referred to as subscribers. Subscribed stock is also known as a subscribed share.
The right share is a share that a company offers to its existing shareholder for purchase instead of selling to new investors; this is done to prevent stock dilution. The price of shares issued during a right share is usually below the current market price of the stocks. Furthermore, issuing of right shares aids the company to gain capital with no floatation cost. Flotation cost is the cost arising from raising funds. The process of issuing this type of share is termed right issue or subscription issue.
The bonus shares are shares that the issuing company gives its existing shareholders in lieu of cash dividend payments, since the shareholders do not have to pay for these additional shares, it is said to be given free. Generally, each shareholder will receive bonus shares based on the number of shares they already own or the equivalent of the dividend they were supposed to be paid. Although the bonus shares add to the total outstanding shares of the company, it has no impact on its market capitalization since it represents the capitalization of excess funds generated by the business. The process of issuing bonus shares is known as the bonus share issue.
Sweat equity shares
Sweat equity shares are shares issued to employees who have shown exceptional dedication and excellent output in their various duties such as readily using their skills, providing intellectual property rights, etc. It is given in place of monetary bonuses or overtime payments to appreciate their time, labor, and dedication which has been beneficial to the growth or smooth running of the company. Sweat equity is generally used to motivate employees who are doing exceptionally well to keep up the good work and to encourage other employees to also do excellent work in order to benefit from the share issue. In rare cases, companies who cannot afford to pay employee salaries such as startups or those undergoing financial challenges issue these shares to employees in exchange for working without a wage. They are sometimes also used to pay for services to the organization by individuals such as lawyers or firms. The sweat equity shares are also called stock for services or equity compensation.
Types of equity share capital
- Authorized share capital.
- Issued share capital.
- Subscribed share capital.
- Called-up share capital.
- Paid-up share capital.
As mentioned earlier, equity stocks are a source of long-term capital for companies, we shall therefore discuss these capital sources below:
Authorized share capital
The authorized share capital is also known as nominal capital. It is the total amount of share capital that any company can raise by issuing new shares. Normally, a company cannot issue more shares than the pre-stated number in their articles of association (AOA); this means that if more capital needs to be raised through the sales of shares, they will have to revise their AOA through a resolution passed at a general meeting of the shareholders to accommodate this change. After this is done and the number of authorized shares is increased, the issuing company can then raise more capital through the sale of new shares.
Issued share capital
The issued share capital is the fund a company can raise from its issued shares. It usually has to be within the limits of the authorized share and is usually lesser or equal to the authorized share capital.
Subscribed share capital
The subscribed share capital is the potential funds a company could make from its stocks that commercial banks and institutional investors have already expressed interest in buying. The amount is usually less than or equal to the value of the issued shares. The funds which the company can make from the remaining part of the issued shares which have not been subscribed to is known as the unsubscribed share capital.
Called-up share capital
Some businesses issue shares to investors with the understanding that these investors will pay for the shares at a later date; when this happens, the funds that would have been realized from such an arrangement are known as the called-up share capital. It is also known as unpaid share capital or the calls in arrears.
Paid up share capital
All funds realized from the sale of shares that have been fully paid to the issuing company are known as the paid-up share capital. The funds can come either from the par value of the shares or the excess capital paid on the shares. The par value of the stock is the base price at which the company issues the shares. The excess capital on the shares is the amount gotten on the shares based on their current market value. For instance, the base value of a share could be two dollars ($2) whereas its current market value could be ten dollars ($10); this means that for every single stock sold, the issuing company makes two dollars ($2) through the stocks par value and eight dollars ($8) in excess capital.
List of equity stocks
- Agilent Technologies Inc
- Barnes Group Inc
- Citigroup Inc
- Dominion Energy Inc
- Eni SpA
- Ford Motor Company
- Genpact Ltd
- Home Depot Inc
- Intel Corporation
- Jacobs Engineering Group Inc
- Kellogg Company
- Loews Corporation
- Macy’s Inc
- NiSource Inc.
- Occidental Petroleum Corporation
- PepsiCo, Inc.
- Quest Diagnostics Inc
- Ryder System, Inc.
- Snap-on Incorporated
- Tootsie Roll Industries, Inc.
- UnitedHealth Group Inc
- Visa Inc
- Wells Fargo & Co
- Xerox Holdings Corp
- Yamana Gold Inc
- ZIM Integrated Shipping Services Ltd
All the above-listed equity stocks pay dividends.
Characteristics of equity stocks
- No maturity date.
- Dividend payments.
- Voting rights.
- Meeting attendance.
- Capital gains.
No maturity date
Equity stocks generally have no maturity date, this means the issuing company can use funds gotten from these shares for as long as they desire without having to pay them back. The stockholders also hold this equity for as long as they want unless they decide to sell it.
Generally, equity shares entitle their holders to receive dividend payments from the issuing company especially if the issuing company declares dividends. For holders of common stocks, this dividend payment is usually paid yearly while for preferred stocks, it is either monthly, quarterly, or annually.
Equity shares give their holders the right to vote on issues of corporate governance and operations. Thus, it means equity stockholders have a say in the company in which they own shares.
Although equity shares usually have no maturity date, the shareholder can choose to transfer their ownership of shares to another person or organization. When the shareholder transfers their shares to another individual or organization voluntarily, it is known as a transfer of shares and a transfer deed has to be executed. When the transfer of shares is initiated by the operation of law, as is the case when the shareholder has become a lunatic or dies; it is known as the transmission of shares.
All equity stockholders have the right to attend any general or annual meetings which are held by the company in which they hold shares. This gives them a participatory role in the business proceedings.
Since equity stocks are traded on the stock exchange, the forces of demand and supply could have an impact on their market value. When this happens, it will in turn be a source of capital gain for the stockholder; this is especially true when the stock experiences an upward change in price.
Considering that the stockholders have invested in the issuing company by purchasing their stock, it means that they have partial ownership of the company.
Equity stock price
- Par value.
- Issue price.
- Share discount.
- Share premium.
- Market value.
Listed above are the various prices associated with equity stocks, we shall discuss each of them below.
This is also known as the face value or legal capital. It is the stock value that is normally recorded in the company’s books of accounts.
The issue price is the price at which companies offer their shares for purchase by investors. The face value and issue price of a stock are usually different for mega companies but the same for start-ups.
When the equity stock price is lower than the face value of the stock, the price difference is known as a discount; this is what brings about the share discount price.
The share premium is the opposite of the share discount. It is a situation whereby equity shares are issued at a price that is higher than their par value. The excess amount is known as the premium.
Since equity stocks trade on the stock exchange, their price tends to fluctuate as influenced by market forces, hence the current price at which the stock trades is known as its market value or stock market value.
Advantages and disadvantages
Equity shares offer some advantages and disadvantages both to the companies that issue them and to the investors that purchase them. We shall discuss these advantages and disadvantages so that both investors and issuing companies can have a better understanding of them.
Advantages of equity shares
To the stockholder
- Claim on income and assets.
- Earn Profits.
- Low liability.
- Participation in the company.
- High liquidity.
Claim on income and assets
As an equity shareholder, the investor has a claim on the income and assets of the issuing company. The claim on income is usually in the form of dividend payments while the claim on assets is applicable when the issuing company liquidates.
Equity stockholders can make a profit on their investment either through the dividends they get paid or through the additional money they make when the issuing company declares an excess distribution or on the sale of the shares they own; this later means of profit is known as a capital gain. The capital gain is made possible by the potential of stock prices to rise.
Although stockholders have an ownership stake in the companies where they have purchased stocks, their liability is low because they only stand the risk of losing their initial investment if the issuing company liquidates and is unable to pay them a claim on assets.
Participation in the company
By virtue of the voting rights that equity shareholders have, they can participate in various decision-making processes of the issuing company and can also take part in its meetings. They can also exercise some form of control through their votes especially when they have a reasonable number of shares as one share is typically equivalent to a vote.
Being traded on the stock market makes equity stocks easily bought or sold which means they are highly liquid.
When it comes to taking out a loan, holders of equity stocks could use their shares as collateral for the loan as they represent creditworthiness. The type of loans that accept shares as collateral is known as stock-based or securities-based loans and are often given by investment brokerages.
To the company
- Source of long-term funds.
- No obligation to pay dividends.
- More retained earnings.
Source of long-term funds
Since equity stocks have no maturity date, it means the issuing company need not worry about paying back the investors. Hence, the funds gotten from the sales of shares serve as a source of permanent capital.
No obligation to pay dividends
Companies are not obligated to pay dividends to equity stockholders, they only pay dividends when and if they have realized enough profits to cover this expense. It is therefore of benefit to them since they can skip dividend payments without any penalty.
More retained earnings
Retained earnings are the amount leftover from a company’s revenue after it has met its obligations to debtholders, taken care of its income taxes, direct costs, indirect costs, and paid stock dividends. Since the company is not obligated to pay equity shareholders, it can use the money to further reinvest or expand the business.
Disadvantages of equity stocks
To the stockholder
- Irregular dividend.
- Market price fluctuations.
- Residual claim.
- High risk.
- Limited impact.
Since issuing companies are not obligated to pay dividends and unpaid dividends do not accumulate, stockholders might get irregular dividends or none at all.
Market price fluctuations
The fact that equity stocks are traded on the stock market makes them liable to price fluctuations based on the market forces of demand and supply.
The claim on income or assets that equity shareholders have is residual. This is a disadvantage to them since they do not get either income or assets until creditors and debtors get paid first, and in cases where nothing is left afterward; they get nothing.
Investing in equity stocks is considered high risk when compared to other investments like bonds who have a higher claim on the issuing company’s profits.
Although holders of equity shares can participate in meetings and vote on decisions in the issuing company, their impact is limited as they generally have inadequate shares to have the deciding vote.
To the company
- Shared ownership.
- Reduced control.
- Difficult to start.
When companies, the ownership of the company becomes shared between them and the investors who have purchased its stocks.
Due to the voting rights of equity stockholders, the company will no longer have the final say on the corporate and managerial issues of the firm. Its shareholders now have a say and can participate in meetings and vote in the processes too.
Difficult to start
Before a private company issues its first shares in an initial public offering (IPO) and becomes public, it has to engage the services of underwriters, merchant banks, stock brokers, etc. They will also have to meet certain criteria and statutory compliances. All these can be quite tasking and difficult to achieve.
Frequently asked questions
Are equity stocks and equity shares the same?
Although the terms are often used interchangeably to mean the same thing, there is a technical difference between the two;
Equity stocks represent ownership of equity in several companies. For example, you can say you own stocks in Walmart, MacDonald, and Alphabet
Equity shares represent ownership in a particular company. For example, you can own shares of Coca-Cola.
Is small-cap stock, an equity stock?
Yes, small-cap stocks are equity stocks because they share the same characteristics, advantages, and disadvantages.
Are small equity stocks in the s&p 500?
No, small equity stocks are not in the S&P 500, they are found in the S&P SmallCap 600. The S&P 500 is an index for large-cap stocks.
What is shareholders equity?
Shareholders equity is the difference gotten when the total liabilities of a company are subtracted from its total assets. It also refers to the total amount invested into a venture by its owners.
Are stocks equities?
Yes, stocks are equities because they represent ownership in the issuing company.
Do paypal equity shares pay dividends?
As of August 2022, PayPal Holdings Inc does not pay dividends on its equity shares.
We have discussed what equity stocks are, seen their various types, and the different capital options they offer. As a company seeking to issue equity stocks, knowing the aforementioned will be of great benefit to you as it guides you through the issuing process. Additionally, the characteristics of equity stocks and their advantages and disadvantages to the issuing company should also be considered.
Investors seeking to purchase equity stocks can look at the list of some equity stocks presented above. They should also consider the advantages and disadvantages that these stocks pose to investors.
Furthermore, both companies and investors should carry out their own personal research before deciding if they want to issue or purchase equity stocks.