Equity shares are famous amongst investors as they provide enormous returns in the future. Equity shares are issued to public investors to earn capital for the expansion of business and also to generate huge amounts of funds. Many organizations source the majority of the capital from public investors. Equity shares are meant for long-term investments and not for short-term investments.
These shares are issued by listed companies and unlisted companies. Listed companies are those companies that have their stocks listed on stock exchanges while unlisted companies do not have such stocks but employ private equity. These shares are issued at a nominal value of Rs 10 each in the case of listed companies and unlisted companies can issue these shares at any price determined by them, but typically it is done at a much higher value than that of listed companies. The share values vary from time to time depending upon various factors.
Let’s understand what do you mean by equity shares and how one can benefit from them in the long run.
What are Shares?
A share is a portion of a company’s ownership. When a business is created, the initial capital need is met by the firm’s partners or investors. As the firm expands, so do its capital requirements. The firm can generate funds through a variety of methods, including business loans, partnering with new investors, and seeking new investors, among others.
Going public, or conducting an initial public offering (IPO), is the most usual and favoured method of raising corporate financing. These shares are provided to investors with the possibility of trading them on a stock market such as the National Stock Market (NSE) or the Bombay Stock Exchange (BSE).
Being a shareholder also allows the investor to have a portion of the company’s profits and growth. The corporation issuing shares guarantees that earnings are distributed to all shareholders as dividends.
The Articles of Association (AoA) and the Memorandum of Association (MoA) of each firm specify the rights and duties of shareholders. These documents contain information such as the company’s business objective(s) and regulations governing dividend distribution among shareholders.
What are Equity Shares?
Equity shares are shares in a corporation that represents your ownership of the company. If you purchase equity shares of a company you become an owner of that particular company. The value of your equity shares depends on the growth prospects of the business and how successfully it will execute its business strategy in the future.
The value of your equity shares is further dependent upon the performance of its competitors, the economy, and several other factors. Equity shares are a popular investment strategy amongst investors as they offer more returns than fixed-income investments, like savings accounts, bonds, and debentures. The major reason is the huge returns offered by the equity shares which makes it very popular.
Equity shares are issued to investors to gain funds for the expansion of the company. Nowadays, organizations source the majority of the funds from public investors. Organizations issue different types of equity shares to public investors, such as preferred equity shares, common stock, and convertible bonds.
A preferred equity share carries certain preferences over an equity share, such as dividends, voting rights, and liquidation preference. Preference shares on the other hand do not carry any preferences over another equity share in terms of dividends, voting rights, or liquidation preference.
Equity shares are generally referred to as stocks, though they may also be known as “equity” or “common stock”. A stock enables the owner (holder) to benefit from the profits and assets of a company. Usually, when people talk about “stocks”, they are referring to equity shares (also known as common stock), not debt instruments, such as bonds or debentures.
Equity shares are more volatile than other types of investments because they carry risks not present in other investments. These risks associated are discussed in the next section.
Risks associated with equity shares
Some people like to invest in equity shares as they believe they will yield high returns. Though it is true there are chances you can lose all your money invested in the equity market. Even if it is not all your money you may face major losses when the company fails to make profits or overall negative market sentiments.
There are a few points to be made clear about investing in equity shares to avoid any risks associated with this form of investment.
Here we discuss the risks associated with an investment in equity shares-
1. Capital loss
Equity shares are dependent on the demand and supply structure. What happens in the stock market is, if investors see that the company is growing they will buy its shares which will increase the share prices. But if later, the company experience losses, people will sell their equity shares which will decrease the price of shares. Therefore, equity shares are dependent on the demand-supply schedule and are highly volatile.
2. Volatility
When there are fluctuations in the prices, such a situation is known as volatility. And when it comes to equity shares, the prices are highly volatile. While it can benefit you a lot when share prices increase and are volatile it might also bring losses when the price goes down. Equity share prices face volatility very often.
These two are the major risks associated with equity shares but when you look at the benefit it gives you these risks are nothing.
Let’s have a look at the advantages of investing in equity shares.
Advantages of investing in Equity Shares
Here are some of the reasons why it’s always benefiting to invest in Equity shares:
1. High-income resource
Equity shares are a great investment strategy. They alone can bring you lots of money let alone be its dividend. The constant dividend and preferential treatment make it the best investment plan.
2. Diversification of your portfolio
Equity investments are full of risks and hence people prefer to invest in debt instruments as they are less risky. But, the stock and bond market performance depends on the demand for these. So, when the demand for debt instruments is low and people are willing to invest in the equity market, investors can find good opportunities in the equity market.
3. Potential returns
Equity shares that are traded on stock exchanges can be the easiest and most profitable investments. This is because many investors are willing to invest in equity shares. This competition pushes up the price of equity shares and thereby their value. Thus, even at times of inflation, equity shares are better to trade-in.
4. Ownership of the company
When you invest in equity shares of a company, you are getting ownership of the company. This means now you are the owner of the assets of the company, not only that, you get preferential treatment as well.
5. Bonus shares
As an equity shareholder, you are equipped with the benefit of getting bonus shares by the company as a reward for your loyalty.
These are some of the major advantages of equity shares.
Types of equity shares
The equity shares are majorly divided into 4 types, which are-
1. Ordinary equity shares
Ordinary Equity shares are issued with a motive to generate capital that can meet long-term expenses, for example, for building machinery or purchasing a new office. The shareholders have the right to participate in management segments and other company operations and usually get dividends from the profits of the company.
Tenders of such shares are offered on public stock exchanges and are available to both small and large investors. Investors who have the majority of the percentage of such shares gain major voting rights.
2. Preference Equity shares
Preference Equity Shares are shares that are issued to the investors as a guarantee of getting their money back with a stipulated interest rate before the remaining profits are distributed among investors. The Preference Equity Shareholders have limited voting rights compared to the common shareholders. This means that they have fewer rights and cannot be part of any decision-making process. However, if the company is in profit, then there is a provision for distributing bonus shares among the investors. This can be used as an incentive for them to invest in such companies and also help the company earn more profits.
3. Bonus shares
When a company generates profit, the equity shareholders get additional shares. These types of shares are issued to the investors in the form of additional shares when the company generates profit. However, bonus shares do not result in the total market capitalization value of a company.
4. Right shares
Right share is one of the ways how an investor can gain profit from the performance of a particular firm. It is a common practice used by many firms for raising capital. Equity investment is also known as equity shares. These shares are offered by a company to certain investors at a discounted price which in turn will grow the stake in the respective business. Though there is no fixed rate of return on investments, these shares provide an opportunity to earn profits depending on the growth and profitability of the company.
Read More: Rights Issue of Shares
Preference shares v/s Equity shares
| Preference shares | Equity shares |
|---|---|
| Preference shares provide dividends at a fixed rate. | Equity shares provide dividends at fluctuating rates. |
| Preference shareholders get no voting rights | Equity shareholders have voting rights |
| Preference shareholders do not have any right to participate in management affairs. | Equity shareholders are participants in the management of the company. |
| Preference shareholders get preference over equity shareholders. | Equity shareholders do not get any preference over preference shareholders. |
| They are less risky | They are riskier. |
Features of equity shares
1. Permanent nature
Equity shares are permanent and often non-redeemable. They form a part of the company and stay till the company decides to dissolve itself.
2. Easily transferable
Equity shareholders can easily transfer their shares just like any other type of share. The dividend on such shares will be then paid to the new shareholders.
3. Yield high returns
Equity shares form one of the three main assets that form your portfolio. Equity shares are high risk, high-reward asset class. They are volatile and are traded in the secondary market. However, if you have a high-risk appetite and can handle the fluctuations in the market, equity shares can be used to build a large corpus which can then be used to create a stable and sustainable income source.
Why purchase Equity Share?
- Protection from Inflation: Investment in profitable stock shares raises people’s standards of living through improvements in asset value. Equity investments offer multiple returns that are greater than the rate at which inflation is eroding people’s purchasing power. As a result, investments usually have an increasing real worth over time.
- High and Greater Income: The capital market’s perfect subset, the equity share market, is what gives investors impressive returns. In addition to the capital growth of these instruments, substantial dividend earnings earned by individuals also contribute to wealth accumulation.
- Diversification of a Portfolio: Investors with a low-risk tolerance choose debt securities since they are less volatile. When it comes to aggregate demand, however, stock and bond market swings are inversely associated. Thus, when the bond market underperforms, risk-averse investors might earn from stock market investments in finest equity shares.
Ways to Purchase Equity Shares
In order to trade in the share market, you will require the following accounts mentioned below:
- Demat Account: You require a demat account to own stocks and other assets under your name.
- Trading Account: To make orders for purchases and sales, you require a trading account with a broker who is authorised to trade on a share market.
- Linked Bank Account: The stock market or an initial public offering (IPO) are the two options for investing in equities.
Things to keep in mind before investing in Equity shares
There are several ways to trade in the stock market. You can either buy or sell stocks and earn handsome returns. But you must invest your money wisely.
There are times when share prices fluctuate greatly and this could be a major setback for you if you are not prepared for it. If you want to earn good returns then you should do proper research, pick the right stock and invest only after researching everything about it.
The investor who wants to get maximum return should be careful to choose only those shares which have strong fundamentals and limited risk exposure. Various factors can affect the price of any stock and hence you must be aware of all such factors to make a profit from shares.
Using leverage can make you win big gains or incur huge losses. You can make profits by buying low and selling high but you must know when to sell off your stocks because if you don’t do that, your capital can get eroded by losses. You might also need to learn how to read charts to identify opportunities in buying and selling stocks.
To have a successful investment in stocks, you must have patience since it could take time for your investments to pay off without incurring large losses. And this requires commitment and consistency from your end as well as some luck.
Read more: Equity Funds, Company Share Capital
Conclusions
Equity shares are a kind of security issued by companies. They are also known as stocks or equity. These stocks give the right to the owner to participate in the profits and assets of a company.
A company can raise money by issuing equity shares. A person who buys these shares becomes a shareholder and is part owner of the company. He gets voting rights in the meetings of the shareholders. The value of his investment increases or decreases depending upon the growth of the business, its profits, and its assets.
There are many different types of equity shares available in the market. The most common type is called ‘ordinary’ or ‘common’ shares. In India, these usually carry voting rights and dividends. Another type of equity share is preference share. These are senior to ordinary shares in that they are entitled to receive any dividends due before ordinary shareholders get theirs. Any residual funds after this will be distributed among the ordinary shareholders. Ordinary shareholders have no preferential claim on the residual assets of the company if it is wound up (closed down).
Equity shares have both advantages and disadvantages. One advantage is that they offer greater returns than fixed-income investments such as savings accounts, bonds, debentures, and deposits. However, they also carry greater risk, especially if you do not choose your stocks wisely.
Equity investors should therefore keep their risk appetite in mind at all times when investing in equity shares!
FAQ’s
Equity shares are an excellent investment option for individuals who are interested in investing a part of their savings in the stock market. However, like any other financial instrument equity shares also have their share of shortcomings.
Equity shares are very volatile are and are a risky investment option even though they have the highest returns when compared to other investments options. The reason behind this risk is that they carry the risk of losing all your money at one go.
These factors are useful to understand for every investor who is planning to invest in equity shares, be it directly or through mutual funds:
- The performance of the company and its competitors
- The economy and the state of the market at large
- Government policies and regulations.
- Technological advancements and innovations.
- The management of the company.
- Foreign exchange rates (Fx).
Any corporation can issue equity shares, although public companies that need to raise capital are more likely to do so. Although private corporations can issue equity shares, this is less usual.
The major danger of investing in stock shares is that their value will fall. This can occur if the company performs poorly or if there is a widespread market decline.
