* Introduction * Forms of equity * Equity and equity-related instruments * Equity Shares * Preference Shares * Differential Shares * Mutual Funds * Euro Issues * Equity Derivatives * Conclusion * Bibliography
Equity implies a share in the ownership of the business. Raising money in the form of issue of equity has its own advantages in that the business does not guarantee fixed returns to the investors. Neither is it obliged to return the invested amount at pre-determined points of time. Absence of such fixed commitments provides flexibility to a business in carrying out its operations in the desired manner.
Additionally, raising funds through equity also provides the business the flexibility of undertaking future investments through debt from banks and FIs. This is because these institutions view the high proportion of equity favorably as the investors in equity (being owners) only have a residual claim on the assets of the business after meeting the claims of lenders (in the event of bankruptcy).
However, in return such equity holders (especially large investors or institutions) may seek a greater say in the management through nominees on the Board of Directors. Further, the returns to the equity holders would arise in the form of dividend (out of the distributable profits) and capital gain through enhanced value of their investment due to the current performance and future prospects of the business. Thus, investors in equity are willing to be subject to higher levels of risk in return for prospects of high level of returns.
The main characteristics of an equity instrument are thus as follows: * Can be floated at face value or at a premium based on the valuation of the company and the portion of the equity offered for investment. * No guarantee of fixed returns to the investors. * Carries residual claim on the assets of the firm in the event of
Bibliography: * Marshall, J.F. & Bansal, V.K. 2009. Financial Engineering: A complete guide to Financial Innovation. PHI: New Delhi. * Gurusamy, S. 2004. Financial Markets and Institutions. Thomson: Singapore. * Francis, J.C. (2nd ed.). 2004. Management of Investments. Mc Graw Hill: Singapore. * Pathak, B.V. (2nd ed.). 2009. The Indian Financial System. Pearson Education. * Khan, M.Y. (6th ed.). 2009. Indian Financial System. Mc Graw Hill: New Delhi.