Equity Capital : Explained
To understand what equity capital is, please refer to my previous post on Debt vs Equity captial
Before understanding equity capital in detail, we need to understand the different types of shares companies issue, which are:
1) Preferred shares : Shares with no voting rights but dividends are paid first. In case of bankruptcy, preferred share holders have first control over company's assets before common share holders
2) Common shares : Voting rights are present but dividends are paid at the last. These are the last ones to be paid after debt & preferred share holders, if a company goes bankrupt
So, a company can issue either preferred shares or common shares to raise money through equity
So when does a company issue preferred stock and when does it issue common stock?
When a company's promoters want to have a greater say in the way it is run, then they issue preferred stock, since preferred stock holders don't have any voting rights
Are these the only way companies raise equity capital or are there any other nuances to it?
These are more or less the two broad ways in which companies raise money through equity. However there are two more things that we need to understand while discussing equity capital:
1) IPO : Initial Public offering is when a private company wants to raise money by selling a share of the company to common people as common stocks. This is usually done when a company starts to become profitable and now needs more money for growth and expansion
2) Rights issue : A rights issue is an invitation to the existing shareholders to buy additional shares in the company at a discount than current share price. You can choose to reject or accept the right issue or sell it to someone else
Since rights issue means share dilution as the company's profits are now distributed over more shares, it is advisable for the shareholders to subscribe to it if they feel that the company has good growth prospects
This is all we have on the series of Debt capital vs Equity capital. Hope it's clear now. Do drop in your comments or use the forum if you have any questions or further suggestions on this topic