{"id":664,"date":"2018-05-29T09:03:15","date_gmt":"2018-05-29T03:33:15","guid":{"rendered":"http:\/\/capitalante.com\/?p=664"},"modified":"2020-05-19T09:47:19","modified_gmt":"2020-05-19T04:17:19","slug":"what-is-equity","status":"publish","type":"post","link":"https:\/\/capitalante.com\/what-is-equity\/","title":{"rendered":"What is Equity"},"content":{"rendered":"

In order to finance the operating cost and expansion plants, the companies usually utilize profits earned from business operations. But as a start-up company, you do not have any revenue or profits. So, in order to get funds, you are left with only two options namely Debt financing, and Equity Financing.<\/span><\/p>\n

What is Debt Financing?<\/strong><\/span><\/h2>\n

When a company requires cash to finance several requirements such as the expansion of business or set up a new unit, the company makes use of debt financing.\u00a0 Debt financing is to borrow a fixed sum from the lender i.e. Bank or NBFCs with an assurance that you will pay back the principal amount along with interest within a fixed rate and time.<\/span><\/p>\n

What is Equity Financing?<\/strong><\/span><\/h2>\n

When a company requires money to finance several requirements such as the expansion of business or set up a new unit, the company makes use of equity financing from the retail investors by selling a percentage of the business or the company to the investors, in exchange for capital. The investors who buy the share of any company have a voting right.<\/span><\/p>\n

Usually, a company can raise funds via issuing Initial Public Offerings, or via venture capital financing. Venture capital financing is beneficial to raise money from high net worth individuals who are looking for investment across various companies to diversify and minimize the risks associated.<\/span><\/p>\n

In the case of initial public offering when the company raises funds from retail investors the venture capitalists have an option to sell or reduce their stake by selling equity shares to institutional or retail investors.<\/span><\/p>\n

What is Equity?<\/strong><\/span><\/h2>\n

Let us assume, I want to start a business and I have a capital of Rs. 80,000\/-. To start my business, the first thing I need is to own land and a factory. The total cost of the land and the factory is Rs. 1,00,000\/-. So I decided to borrow Rs. 20,000\/- from an individual. I have borrowed the capital of Rs. 20,000\/- from an investor and in reply I gave him a share of my company through the ratio-proportion method. This is share or equity. As the investor borrowed me Rs. 20,000\/- and I have invested Rs. 80,000\/- the ratio is 4:1. As I give him my company\u2019s share he is also an owner of my factory, land, and other assets in the ratio of 4:1.<\/span><\/p>\n

If after one year our company earned a profit of Rs. 10,000\/- then the profit was equally divided among the equity shareholders in the ratio of 4:1. According to the ratio proportion, my profit amount is Rs. 8,000\/- and another investor will get Rs. 2,000\/-. This amount is called a dividend.<\/span><\/p>\n