Cost of Capital^51
they have put in into the company and not unlimited.
Unlimited profit sharing means that equity shares have an unlimited potential for dividend
payments and price appreciation. Which is why investing in equity is so exciting and
full of opportunities. At the same time the risk is also high because there is nothing
fixed about earnings which can fluctuate widely depending upon the business
environment. This is also the reason why this book will devote much more time to
equity than on debt.
Shareholders, being the owners of the company, elect the board of directors and vote
on major issues that affect the functioning and long term plans of the company. Major
shareholders take up seats on the board of directors and influence the decisions that
are taken. Small shareholders cannot exercise the same level of control so when they
do not like the way the company is being run they simply sell their shares and invest
their money somewhere else.
A shareholder, by virtue of being an owner, is normally entitled to four basic rights of
ownership:
- claim on a share of the company's undivided assets in proportion to number of
shares held (this is not to say that he can return the shares and get a part of the
assets, he will not get it), - proportionate voting power in the election of Directors and other business conducted
at annual general meeting which can be exercised either by attending of the meeting
or by Proxy, - dividends, when earned and declared by the Board of Directors, as also a
proportionate share in the residual earnings which the company retains, and - pre-emptive right to subscribe to additional share offerings before they are offered
to general investors unless a special resolution has been passed in the annual
general meeting to the contrary.
The piece of paper which testifies the ownership position of the shareholder in a company
is called a share certificate. The number of shares, their par value, the certificate
number, distinctive numbers, the date of issue and the owner's name are mentioned on
the share certificate.
Terms Associated with Equity Securities
Let us look at some of key terms that are associated with equity shares:
Stock
Ownership of a company represented by shares that are a claim on the company's
earnings and assets.
Share