Trading on equity

 Trading

Trading on equity occurs when a corporation uses bonds, other debt, and preferred stock to increase its earnings on common stock. For example, a corporation might use long term debt to purchase assets that are expected to earn more than the interest on the debt.

Trading on equity has two primary advantages :

                                                                              Enhanced earnings. It may allow an entity to earn a disproportionate amount on its assets.

Benefits of equity share investment are dividend entitlement, capital gains, limited liability, control, claim over income and assets, right shares, bonus shares, liquidity etc. Disadvantages are dividend uncertainty, high risk, fluctuation in market price, limited control, residual claim etc.

Equity share is looked at from different perspectives by different stakeholders. Broadly, there are two major angles of looking at it – Company and Investor Angle. So, any statement about equity capital would have a different meaning for a company and an investor. We will look at the investor angle of equity share investment

　

DIVIDEND

An investor is entitled to receive a dividend from the company. It is one of the two main sources of return on his investment.

CAPITAL GAIN

The other source of return on investment apart from dividend is the capital gains. Gains which arise due to rise in market price of the share.

Benefits and Disadvantages of Equity Shares Investment

Benefits and Disadvantages of Equity Shares Investment

LIMITED LIABILITY

Liability of shareholder or investor is limited to the extent of the investment made. If the company goes into losses, the share of loss over and above the capital investment would not be borne by the investor.

EXERCISE CONTROL

By investing in the company, the shareholder gets ownership in the company and thereby he can exercise control. In official terms, he gets voting rights in the company.

CLAIM OVER ASSETS AND INCOME

An investor of equity share is the owner of the company and so is the owner of the assets of that company. He enjoys a share of the incomes of the company. He will receive some part of that income in cash in the form of dividend and remaining capital is reinvested in the company.

RIGHTS SHARES

Whenever companies require further capital for expansion etc, they tend to issue ‘rights shares’. By issuing such shares, ownership and control of existing shareholders are preserved and the investor receives investment priority over other general investors.

BONUS SHARES

At times, companies decide to issue bonus shares to its shareholders. It is also a type of dividend. Bonus shares are free shares given to existing shareholders and many times they are given in lieu of dividends.

LIQUIDITY

The shares of the company which is listed on stock exchanges have the benefit of any time liquidity. The shares can very easily transfer ownership.

STOCK SPLIT

Stock split means splitting a share into parts. How should an investor be benefited by this? By splitting of share, the per-share price reduces in the market which eventually increases the readability of share. At the end, stock split results in higher volumes with a number of investors leading to high liquidity of the share.

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