Equity Interest

Equity Interest Meaning

Equity Interest can be described as the percentage of ownership rights an individual or a company or any other form of organisation holds in one company. It gives the holder voting right in that company and is said to be the residual owner of the company. I.e. they have residual rights in economic benefits obtained from the business or realization from assets.

Explanation

We describe Equity Interest as the interest or ownership one person holds in the share capital of a companyShare Capital Of A CompanyShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more. A company funds its business needs from varied forms of funding. One of the major is through share capital. Under share capital, there are two types of holdings equity share capital and preference share capital. Preference share capital is similar to a loan which binds a company to pay a fixed amount of dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more. However, in the case of equity share capital, the company does not have a fixed repayment burden. The company pays these shareholders a dividend as decided by a board of directors and top-level management. There might be a case where equity share capital does not earn even single rupee.

In case of liquidation of the companyLiquidation Of The CompanyLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more, liability of equity shareholders is fixed to the extent of their share capital holding. Similarly, in the case of liquidation, if there are assets left after settlement of all liabilities, it gets distributed among shareholders in proportion to their equity. We calculate the net equity interest as the addition of all assets involved in a business reduced by outsiders liability and claims, also reduced by preference shareholders capital dues.

Equity Interest

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Example

Equity interest is nothing other than equity share capital holding. It may take various forms depending on the percentage of holding. Like if one company holds more than 50% share capital of other than it will form the subsidiary company. If the holding is between 20 to 50%, then it will be known as an affiliated companyAffiliated CompanyAffiliated companies can be described as an entity (company) in which another company holds less than 50% of its share capital i.e. having a minority interest in another company. Moreover, two companies can also be said as an affiliated company if both are been controlled by a third company.read more.

Equity Interest Rates

 In the case of multinational conglomeratesConglomeratesA conglomerate is a company or corporation made up of different businesses that operate in various industries or sectors, often unrelated. It holds a stake in multiple smaller companies that choose to manage their business separately to avoid the risk of being in a single market, thus, taking advantage of diversification.read more having a varied business and at varied locations, a single investor can’t invest in such a big company. In such a case, there are different investors, organizations like FII, FDI, joint investors, etc.. These invest their funds in a company, which in turn runs the business. Therefore, the division of ownership of a company is into shares of small size having a fixed face(Base) value. Any person having an interest in the growth potential of a company may invest in its share capital. Accordingly, the percentage of share capital owned by an individual in its total share capital is its equity interest holdings.

The rate of interest being earned by such investors on their invested amount is known as the equity interest rate. There is no fixed amount which the company pays to an equity holder. Depending on the profits earned by the organization, the percentage of it also varies from year to year. As discussed earlier, equity holders are the residuary interest holders of a company. Therefore, the rate of returnRate Of ReturnRate of Return (ROR) refers to the expected return on investment (gain or loss) & it is expressed as a percentage. You can calculate this by, ROR = {(Current Investment Value – Original Investment Value)/Original Investment Value} * 100read more varies according to the value of profits derived by the organization. The rates divide into various categories like total earnings, earnings distributed to equity interest holders in cash, accrued earning. Accordingly, a stakeholder may compare different forms of earnings as per his requirement.

How Shareholders Obtain Equity Interest?

Equity interest is nothing different from equity share capital.  There are varied forms in which a person can become an equity shareholder of any company. In the case of listed companies, a person can buy equity shares directly from the secondary market where shares trade regularly or offline from brokers. Also, in the case of companies that are getting listed in stock markets for the very first time, a person can obtain it directly invest in the primary share market. In the case of unlisted companies, usually, it is an organization that gets managed by a small group of interest holders.

In such a scenario, a person can obtain equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet.read more with the consent of all other shareholders. Also, a person may indirectly obtain equity by investing in different mutual funds and schemes which invest in the equity share capital of listed companies. Also, there are certain loan agreements that contain stated terms and conditions like in case of non-payment, the grantor may get the right to own and obtain an interest in the share capital of the company.

Conclusion

Equity interest can be defined as the percentage of equity share capital been owned by an individual. It gives the individual owner voting rights in a company. Further, it also gives the right to avail participation over the earnings of that organization. A company needs huge funds in running its day to day business. No single person has large funds to invest and take the risk in a business; accordingly, different people invest according to their capability and form share capital of a company.

Equity interest has residual ownership rights in the assets and earnings of a company. One can become the owner either by purchasing shares in a secondary market where equity shares are regularly traded or from the primary market (in a case where shares are getting listed for the first time). Also, sometimes an entity becomes an equity holder by virtue of terms and conditions stated in any contract or agreement.

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