What Is Equity Share?

What Is Equity Share?

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Rashmi
Rashmi Karan
Manager - Content
Updated on Nov 23, 2023 15:09 IST

Equity shares have gained a lot of popularity in recent years. Equity shares offer a fraction of ownership of the company. Therefore, equity shareholders are the part owners of a firm. When a private firm first sells stock shares to the public, the process is called an initial public offering (IPO). After listing, equity shares trade on the stock exchange. Learn what is equity share, its types, its advantages and disadvantages, and points to consider when investing in equity shares.

Equity Shares

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What are Equity Shares?

Equity Shares MeaningAn equity share is a company’s partial ownership. A company issues equity shares to raise funds while diluting its ownership. It allows the investors to purchase units of equity shares and share the firm’s ownership with them. Investors owning the equity shares of a company contribute towards the company’s total capital and become shareholders.

Investors can get monetary benefits in capital appreciation, dividends, and voting rights in crucial company matters through equity investment.

Now you know about equity, what is equity share, let us move on to its objectives.

Objectives of Equity Shares

The main objective of the companies to issue equity shares is to raise funds for growth and organizational expansions. Equity shareholders are obligated to receive a share of the profits made by the company.  

The value of an equity share largely depends on the face value of the company or its book value. If more and more people invest in the shares of a specific company, its share prices will rise. On the other hand, if more and more people sell off their shares, the share prices will fall flat.

The supply and demand of the shares of a company determine the price of the shares. The supply and demand will increase when the shares start trading on the exchange. Companies with promising growth prospects attract more investors since they wish to make monetary benefits from their capital appreciation. Investors will want to exit their positions if the company is underperforming.

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Types of Equity Shares

Following are the different types of Equity Shares:

Ordinary Shares: These are the shares a company acquires to raise funds for long-term expenses. In such cases, investors get part ownership of the company according to the number of shares they hold. Ordinary shareholders have voting rights.

Preference Shares: Preference equity shares assure the payment of a cumulative dividend to investors before ordinary shareholders. On the other hand, preference shareholders lack common shareholders’ voting and membership rights.

Bonus Shares: Bonus shares are equity shares a company issues from its retained earnings. In other words, a company distributes its profits as a bonus issue. However, this doesn’t increase the company’s market capitalization.

Rights Shares: Rights shares are for the specific premium investors of the company. Thus, the equity stake of such holders is high. Companies offer rights issues at discounted prices. The idea is to raise funds to meet the firm’s financial needs.

Sweat Equity: Company employees, including directors, hold sweat equity shares. The company issues such shares to the employees for value additions, excellent work done, or any other remarkable achievements as a part of their compensation or at discounted prices.

Employee Stock Options (ESOPs): ESOPs are part of a company’s incentive and retention strategy. The employees can purchase shares at a predetermined price at a future date per an ESOP’s conditions. Employees and directors who exercise their ESOP grant option receive these shares.

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Features of Equity Shares

Permanent: Equity shares are permanent assets that must be returned only when the company dissolves.

Significant ROI: Equity shares have the potential to generate significant returns for the investors, but yes, they come with market risks, meaning they are highly volatile, and the price movements can be drastic.

Dividends: With equity shares, shareholders share the company’s profits through dividends and bonuses. However, remember that the company is not obligated to distribute dividends. It may opt not to give dividends if it doesn’t make substantial profits and surplus cash flow.

Voting Rights: In most cases, equity shareholders have voting rights, which allows them to select the people who will govern the company. Choosing effective managers assists the company in enhancing its annual turnover. This allows investors to receive higher average dividend incomes.

Additional Profits: Equity shareholders can make additional profits, depending on the investor’s wealth.

Liquidity: Equity shares are highly liquid investments. The shares are traded on the stock exchanges. This allows investors to buy and sell them anytime during trading hours without liquidating them. 

Limited Liability: If you are an ordinary shareholder, you will not be affected by the losses or debt obligations a company bears. The only effect is falling stock prices, thereby affecting the ROI of the shareholder.

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How to Invest in Equity Shares?

You would need the following to invest in equity shares – 

Demat Account: If you want to start investing in the stock market, you need a Demat Account. Your KYC documents should be verified.

Trading Account: You need a trading account to place an order in the stock market. You need a trading account to buy or sell your stock.

Linked Bank Account: To trade and invest in markets, you must have a bank account linked with your trading and Demat accounts.

After you ensure you meet the criteria mentioned above, you will have two options to invest as an equity shareholder –

IPO or Primary Market: IPO allows you to invest directly in the shares it issues. IPO is a situation when the companies require funds, and thus they issue shares in the market. It is the first time a company has come up with shares.

FPO or Secondary Market: Follow on Public offer (FPO) is a condition where you are in stocks from other shareholders. Here the transactions are between the company’s existing shareholder and another shareholder from the market.

Disadvantages of Investing in Equity Shares

The following are the disadvantages of equity shares:

  • If any company is not performing well, shareholders are not entitled to any dividends or profits.
  • Being volatile, market risks are always associated with shares.
  • In case of dissolution of the company, equity shareholders will get their capital at last.

Factors You Must Consider Before Investing In Equity Shares

Risks: You should know your risk appetite before picking any stocks. Opt for less volatile equities if you think you cannot handle the risks or your low-risk appetite.

Investment objective: If your strategy is to earn a daily return, go for intraday trading. If you plan to invest for an extended period, choose long-term investing.

Amount of capital: If you have a tremendous amount, you should go for blue-chip stocks, as most are profitable in the long run.

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Conclusion

Equities are the tremendous and most common tools for investors to make returns. But as you must be aware, investing in equities is subject to market risks. So before investing in anything, be it a share or a company, take your time, do proper analysis and research, and then decide. You can check out finance-related articles to build your understanding of finances.

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FAQs

How do equity shares differ from other types of shares?

Equity shares differ from other types of shares, such as preference shares, by providing shareholders with voting rights and a share in the company's residual profits.

How do equity shares differ from other types of shares?

Equity shares differ from other types of shares, such as preference shares, by providing shareholders with voting rights and a share in the company's residual profits.

How do I acquire equity shares?

You can acquire equity shares through initial public offerings (IPOs), secondary markets (stock exchanges), or private placements.

What is the risk associated with equity shares?

Equity shares carry a higher risk than other investments, as their value fluctuates with market conditions and the company's performance. There is a possibility of losing the invested capital.

Are equity shares suitable for long-term investments?

Equity shares are often considered suitable for long-term investments as they have the potential to generate higher returns over an extended period, although they are subject to market volatility.

Can equity shareholders benefit from a company's liquidation?

Yes, in the event of a company's liquidation, equity shareholders have the right to receive their share from the remaining assets after all debts and obligations have been settled.

About the Author
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Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio

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