What Is Equity Share Capital?

Equity share capital, or equity capital, is the economic fuel that organizations rely on to finance their operations. In the modern-day business environment, insufficient funding may cause a firm to incur losses and halt expansion plans. Financial market participants play a cardinal role in providing equity financing to all organizations, including businesses, nonprofits and government institutions.

Definition

Equity capital represents investments that financial market participants make in a company. Buyers of equity capital are also known as shareholders or stockholders. After investing in a company, they receive voting rights and can attend annual shareholders' meetings. Equally important, equity holders receive periodic dividends and make profits when share prices rise in financial markets. Shareholders invest in two types of stock: common and preferred. Common stockholders are traditional, regular equity buyers. Preferred stockholders have the same benefits as common shareholders but preferred dividends take precedence. In other words, preferred shareholders receive dividends before common stockholders.

Significance

Equity capital is integral to a company's financing strategies, as it provides the lifeblood necessary to fund short-term initiatives. Besides, equity helps senior leadership maintain healthy working capital ratios. Working capital gauges an organization's short-term cash and equals current assets minus current liabilities. Having a varied group of equity holders helps a company diversify its financing sources, enabling corporate managers to seek additional funds for long-term expansion plans.

Issuance

Companies seek cash by issuing shares of equity and debt in financial markets, also known as securities exchanges. Examples of exchanges include the New York Stock Exchange and London Stock Exchange. Under the tutelage of investment bankers, firms raise funds from the public and stock market players. Seeking the guidance of investment bankers is essential, as they generally possess economic acumen a company may rely on to fund corporate activities.

Accounting

To record a stock issuance, a bookkeeper debits the cash account, crediting the common stock and additional paid-in capital accounts. In accounting terminology, debiting an asset account, such as cash, means increasing the account's balance. The opposite is true for a credit entry. As such, the equity issuance increases corporate funds. To record dividend payments, the bookkeeper credits the cash account and debits the dividends payable account.

Financial Reporting

A corporate accountant reports equity capital in the statement of financial condition, also known as the balance sheet or statement of financial position. In a balance sheet, equity capital equals total assets minus total liabilities. Assets are economic resources that a firm owns, and liabilities are debts it must repay. The accountant also reports shareholders' capital in the statement of retained earnings, otherwise known as the equity statement. The statement indicates a firm's beginning equity balance, dividends paid, income generated during a specified period and ending equity balance.

References

• Maps of World Finance: Sources of Equity Financing
• Encyclopedia of Business: Equity Financing
• The University of Iowa --- Tippie College of Business: Financial Statement Analysis