Equity Financing

Sresth Verma
BBA 6A
05290201718
What Is Equity Financing?
• Equity financing is the process of raising capital through the sale of shares. Companies
raise money because they might have a short-term need to pay bills, or they might have
a long-term goal and require funds to invest in their growth. By selling shares, a
company is effectively selling ownership in their company in return for cash.

• Equity financing comes from many sources: for example, an entrepreneur's friends and
family, investors, or an initial public offering (IPO). An IPO is a process that private
companies undergo in order to offer shares of their business to the public in a new stock
issuance. Public share issuance allows a company to raise capital from public
investors. Industry giants, such as Google and Facebook, raised billions in capital
through IPOs.

• While the term equity financing refers to the financing of public companies listed on an
exchange, the term also applies to private company financing.
Key points:
• Equity financing is used when companies, often start-ups, have a short-term need for cash.

• It is typical for companies to use equity financing several times during the process of reaching
maturity.

• There are two methods of equity financing: the private placement of stock with investors and
public stock offerings.

• Equity financing differs from debt financing: the first involves borrowing money while the
latter involves selling a portion of equity in the company.

• National and local governments keep a close watch on equity financing to ensure that
everything done follows regulations. 
How Equity Financing Works
• Equity financing involves the sale of common equity, but also the sale of other equity or
quasi-equity instruments such as preferred stock, convertible preferred stock, and
equity units that include common shares and warrants.

• A startup that grows into a successful company will have several rounds of equity
financing as it evolves. Since a startup typically attracts different types of investors at
various stages of its evolution, it may use different equity instruments for its financing
needs.

• For example, angel investors and venture capitalists—who are generally the first
investors in a startup—are inclined to favor convertible preferred shares rather than
common equity in exchange for funding new companies because the former have greater
upside potential and some downside protection. Once the company has grown large
enough to consider going public, it may consider selling common equity to institutional
and retail investors.
Debt Financing vs. Equity Financing
What are Equity Shares?
• Equity shares are long-term financing sources
for any company. These shares are issued to the
general public and are non-redeemable in
nature. Investors in such shares hold the right to
vote, share profits and claim assets of a
company. The value in case of equity shares can
be expressed in various terms like par value, face
value, book value and so on.
Features of Equity Shares:
• Equity shares have the following characteristics:

• Most types of equity shares include voting rights to an investor, allowing him/her to choose individuals
responsible to run the business. Electing efficient managers allows a company to increase its annual
turnover, thereby increasing investors’ average dividend income.

• Equity shareholders are eligible to realise additional profits generated by a company in a fiscal year.
This increases the total wealth of individual investors having a considerable investment in equity
shares of a company.

• Even though equity shares are not repaid until a business closes down, equity shares already issued can
be traded in the secondary capital market. Thus, investors can withdraw funds from a company upon
their discretion. This ensures massive wealth creation through capital appreciation of such shares.
What are Preference shares?
• Preference shares also commonly known as preferred stock, is a
special type of share where dividends are paid to shareholders prior
to the issuance of common stock dividends. Preference share holders
hold preferential rights over common shareholders when it comes to
sharing profits. Consequently, if a company lands into bankruptcy,
preference shareholders are issued dividends first or have the first
right to the company’s assets before common stock investors. For
preference shareholders, the dividend is fixed however, they don’t
hold voting rights as opposed to common shareholders.
Different Types Of Preference Shares
• Cumulative Preference Share : Cumulative shares have a provision that allows investors to
be paid dividends in arrears. It so happens that a company doesn’t have the financial capacity to
pay dividends to its shareholders. Unless dividends are not paid to preference shareholders, they
cannot be paid to common shareholders. In such a scenario, the company decides to pay
cumulative dividends in the next year . Sometimes, interest earned by the shareholders on arrear
dividends is also given to the cumulative preferred stock holders.
• Non Cumulative Preference Shares : Non cumulative preferred shareholders are eligible to
be paid dividends only from a year’s profit. So a non cumulative preferred stock does not issue
unpaid dividends to the shareholders neither can holders of such stock claim unpaid dividends in
the future.
• Redeemable Preference Shares : In case of redeemable shares,a company has the right to
buy back the shares for its own use from shareholders at a fixed date or by giving prior notice
after a period of time.
• Irredeemable Preference Shares :  These shares can only be redeemed by the company at
the time of liquidation or when the company winds up operations.
• Participating preference shares : Participating preference shares is where the company issuing the dividends pays
increased dividends to the shareholders along with the preference dividend. This is done at a fixed rate. Additionally,
participating preference shareholders have rights on the surplus asset of the company at the time of its liquidation.

• Non Participating Preference Shares : In case of non participating preference shares the shareholders are entitled
only to the dividends at a fixed rate and not to the surplus profit. The extra profit is distributed among the common
shareholders.

• Convertible Preference Shares : Shareholders of such shares have the option to convert the common shares to
preferred shared. These shares are opted by investors who wish to receive preferred share dividend as well as want to
benefit from an increase in the common shares. So the benefits are two fold- fixed returns by means of preferred
dividends as well as the opportunity to earn higher returns as the common stock price increases. This conversion can
happen within a certain period as per prior agreement, stated in the memorandum.

• Non Convertible Preference Shares : Shareholders of these shares do not hold the rights to convert to issuer’s
common shares.
Conclusion 
• It is clear that equity shares vs preference shares are types of shares issued by the company to raise the
fund to full feel their requirement. Shares are issued by both public as well as private companies and if the
company is in profit or say perform well shareholders of the company get that profit in the form of
dividend at a fixed and fluctuated rate.

• Equity shares give the highest return on investment at the cost of the highest risk however preference
shares give a fixed sum of money at the cost of zero or minimal risk. If anyone looking to investing money
in shares must have knowledge about the stock market to avoid losses from an upward and downward
price.

• A share price of any company depends on the performs of the company and on some external factors.
Long term investment in shares provided good returns for longer periods. If anyone looking for a risk-free
investment then investing in the mutual fund is the best option for them as a risk in this comparatively
less than stock.