Why is equity share capital called risk capital ?

Solution

Equity shares capital is called risk capital because :

1. Equity shares have the risk of fluctuating returns and the risk of fluctuating market value of shares. In times of adversity, these may be low returns or even no returns.

2. Equity share capital is a permanent source of finance. It cannot be refunded during the life of the company. When there is no scope for expansion or new investment during periods of economic depression, the equity capital may remain idle, the rate of return may be reduced since there is no commitment to pay and no fixed obligations to be made on equity capital. There is always the possibility of putting it to such optimal uses.

3. There are too many procedural delays and too many time consuming formalities to be completed before any public issue of shares can be made.

4. An equity issue cannot be made any time the company wants. It depends on market conditions.

Some More Questions From Sources of Business Finance Chapter

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Sources Of Business Finance

Why is equity share capital called risk capital ?

Some More Questions From Sources of Business Finance Chapter

Give meaning of business finance.

Give meaning of fixed capital.

Give meaning of working capital.

Give types of working capital.

Give meaning of owner’s capital.

Give meaning of borrowed capital.

Give meaning of long-term finance.

Give meaning of medium-term finance.

Give meaning of short-term finance.

Define shares.

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