What is equity?
Equity is the term commonly used to describe the ordinary share capital of a business.
Ordinary shares in the equity capital of a business entitle the holders to all distributed profits
after the holders of debentures and preference shares have been paid.
Ordinary ( equity) shares
Ordinary shares are issued to the owners of a company. The ordinary shares of UK companies
typically have a nominal or 'face' value (usually something like £1 or 5Op, but shares with a
nominal value of 1p, 2p or 2Sp are not uncommon).
However, it is important to understand that the market value of a company's shares has little (if
any) relationship to their nominal or face value. The market value of a company's shares is
determined by the price another investor is prepared to pay for them. In the case of publicly-
quoted companies, this is reflected in the market value of the ordinary shares traded on the stock
exchange (the "share price").
In the case of privately-owned companies, where there is unlikely to be much trading in shares,
market value is often determined when the business is sold or when a minority shareholding is
valued for taxation purposes.
In your studies, you may also come across "Deferred ordinary shares". These are a form of
ordinary shares, which are entitled to a dividend only after a certain date or only if profits rise
above a certain amount. Voting rights might also differ from those attached to other ordinary
Why might a company issue ordinary shares?
A new issue of shares might be made for several reasons:
(1) The company might want to raise more cash