Equity finance: An overview

Equity finance in simple terms is the sale of shares or stock to investors. This can be done through the stock market, to new investors and old existing holders of the shares. It is common knowledge that shares are sold and bought every day through the stock exchanges.  The nominal value of the share below which it cannot be sold is determined by laws. This value has no bearing on the market value of the share in question. New shares of a company are sold at its nascent stage or later on at a premium value that almost always exceeds its nominal value.

The common man who owns shares of various companies have certain rights. Listed below are some of the common rights that they enjoy

• Be present at general meetings of companies
• Can vote during election for appointments of directors
• Can vote for appointment and termination of auditors
• Annual accounts and reports of auditors should be communicated to share holders
• Get dividends
• Right to vote on matters of importance like repurchase or take over
• Share of remaining assets after liquidation of company
• Preemptive right to new shares of company

It is in the stock exchange that the stocks and securities are traded. A very well run stock exchange is mandatory for the growth of funds and capital allocations. A stock exchange plays a pivotal role in building reputation and publicity of a company. The general behavior of corporate is improved by it.

Share markets are of in two stages, the primary market and the secondary market. In the primary market new shares are sold to investors with the aim of raising capital for development or expansion programs. The secondary market usually functions between investors and shares are exchanged hands.

Trading that is performed in the stock exchanges are also of two types – quote driven trading system and the order driven trading systems.

This is the common trading system that is practiced everywhere. In this a quote is made on a share by an investor and another investor makes an offer. The bid price is the price for which the share can be bought and offer price is the price at which the investor is willing to sell.  The price difference is called ‘spread’.

In order trading there are no market intermediaries. The investors buy and sell orders without middlemen. Buying and selling orders are fed into an automated central system that matches investors and buyers automatically. Thus the name of matched bargain systems is applicable to this for of trading.

Capital has to be raised for business to progress and this is done on the basis of equity finances. Shares of the company are sold and money is raised.  There are many ways to raise equity capital. A firm can release a pre determined number of shares in the market. This is decided by the original share holders of the company and can be used for raising the much needed capital. Still another method is to go public with your company and get listed.