Question

Discuss the benefits and issues related to stock ownership as an investment type. What are the issues related to equity as a source of additional funds, and valuation concepts?

Answer 1

Benefits of having equity shares as investment type

- Equity gives ownership right. One is consider as owner if he has equity shares

- Equity shares gives it's holder votings rights in matter of business of company

- One is entitled to dividends

- Equity holders gets benefits of bonus shares , right shares etc which leads to wealth creation

Issues of having equity shares as investment type

- Equity as an instrument of investment is highly risky as in case of liquidation of company, equity share holder comes last in list of claiments

- There is uncertainity of dividend.

- In secondary market, prices of equity shares fluctuates very much.

Issues related to equity as a source of additional funds, and valuation concepts

- As owenership is offered , equity share holders can interfere in day to day business

- Equity shares are costly than any other source of funds

- Like interest, dividends are not tax deductible

- There are various ways to calculate price of shares, however there are drawbacks and assumptions related to it which are not practical in real life