Equity shares, also known as common stock or ordinary shares, are a type of financial instrument that symbolises ownership in a corporation. By purchasing equity shares, individuals or institutional investors become shareholders and get a share of the company’s ownership and profits.
Shareholders who own equity share have access to several significant benefits and rights within the company. The ownership and voting rights that come with holding equity shares are important factors.
Shareholders have the right to participate in corporate decision-making, typically by casting a vote on issues like the appointment of directors, significant corporate decisions, and amendments to the bylaws.
The voting power of shareholders is typically inversely correlated with the number of shares they own, giving them a say in how the business will develop in the future.
Another important characteristic of equity shares is the right to dividends. When a business makes money, it might give some of that money back to its shareholders in the form of dividends. Normally, dividends are distributed in proportion to the number of equity shares that each shareholder owns.
However, the company’s profitability, financial stability, and dividend policy all affect whether or not dividends are paid. Although dividends are a source of income for shareholders, it’s important to remember that they are not always paid out; instead, businesses may decide to keep their profits or distribute them in other ways.
A residual claim on the company’s assets is also granted by equity shares. Equity shareholders are entitled to the company’s assets in the event of liquidation or winding up, following payment of all debts and liabilities.
It’s crucial to realise that in these circumstances, creditors and debt holders typically take precedence over equity shareholders, who typically have a lower priority. This implies that equity shareholders may be more at risk of losing their investment if the company experiences financial difficulties.
Types of Equity Share
Following are the types of Equity Shares:
Ordinary Shares
The shares a company issues to raise money to cover long-term expenses are known as ordinary shares. Investors receive a portion of the company. The amount corresponds to the number of shares held at that time. Voting privileges will be available to common shareholders.
Preference Shares
Preference equity shares guarantee that investors will receive cumulative dividends before common shareholders. Preference shareholders, on the other hand, don’t have the same membership and voting privileges as common shareholders.
These benefits are dependent on the company’s performance during a particular fiscal year. Equity shareholders who do not participate do not receive this benefit.
Bonus Shares
A type of equity share issued by a company from its retained earnings is called a bonus share. In other words, a company issues bonus shares to distribute its profits. However, unlike other equity shares, this does not raise the company’s market capitalization.
Rights Shares
The company only issues these shares to certain high-end investors. The equity stake of such holders consequently rises. The goal is to raise money to meet needs for funding.
Sweat Equity
Sweat equity shares are given to a company’s directors and employees. For their excellent work in supplying the company with intellectual property rights, know-how, or value additions, they receive the shares at a discount.
Employee Stock Options (ESOPs)
ESOPs are provided by a company to its employees as a retention strategy and incentive. Under the terms of an ESOP, employees are given the choice to buy shares at a predetermined price later. These shares are given to employees and directors who exercise their ESOP grant option.
Features of Equity Share
Ownership: Ownership in a company is represented by equity shares. Equity shares purchases make an individual or institutional investor a shareholder and give them a proportionate ownership stake in the business. The expansion and success of the business could benefit shareholders through capital gains and dividend payments.
Voting Rights: Equity shareholders typically have voting rights, enabling them to take part in corporate decision-making. Each share of stock typically entitles the holder to one vote, which allows shareholders to cast ballots on important corporate actions like electing the board of directors and making decisions that have a significant impact on the company’s operations and direction.
Dividend Entitlement: Dividends, or the distribution of a portion of a company’s profits to shareholders, are a right of equity shareholders. The board of directors of the company declares dividends, which are then distributed according to the number of shares that each shareholder owns. The payment of dividends, however, is dependent on the company’s financial performance, profitability, and dividend policy.
Residual Claim: Equity shareholders have a residual claim on the company’s assets in the event of liquidation or winding up. Equity shareholders have a claim on any assets left over after all debts and other obligations of the business have been satisfied. Equity shareholders typically rank lower in the hierarchy of claims than debt holders and creditors, though.
Limited Liability: Holding equity shares has a number of benefits, one of which is limited liability. The maximum amount that shareholders are liable for is the sum that they have contributed to the business by purchasing shares. To protect their personal assets from being used to settle company liabilities, shareholders are not personally liable for the company’s debts or obligations above and beyond their investment.
Transferability: Equity shares can typically be sold or transferred, giving shareholders the ability to do so. Due to their ability to buy or sell shares on the secondary market, this transferability gives shareholders liquidity. Subject to market conditions and regulatory requirements, shareholders may engage in trading activities through stock exchanges or over-the-counter transactions.
Risk and Return: Equity shares can typically be sold or transferred, giving shareholders the ability to do so. Due to their ability to buy or sell shares on the secondary market, this transferability gives shareholders liquidity. Subject to market conditions and regulatory requirements, shareholders may engage in trading activities through stock exchanges or over-the-counter transactions.
Preemptive Rights: Preemption rights, also known as rights of first refusal, may be granted to equity shareholders. By purchasing additional shares before they are made available to outside investors, shareholders have the chance to maintain their share of the company. Preemptive rights help safeguard the interests of current shareholders and guarantee that their proportionate ownership is not diminished.
Participation in Shareholders’ Meetings: Shareholder meetings are open to equity shareholders, who also have the right to attend and participate. These gatherings give shareholders a forum to talk about business issues, pose inquiries, and interact with other shareholders and the company’s management. During these meetings, shareholders can present their views, express their concerns, and cast votes.
How to Invest in Equity Shares?
- To facilitate transactions, open a DEMAT account and make sure it is connected to an active bank account.
- Log in to the DEMAT account using the web platform or the mobile application.
- Choose a stock that you want to buy.
- Make sure your bank account has enough money in it for you to purchase the shares you want.
- Purchase the stock at the listed price and the desired quantity.
- Your purchase order will be carried out once a seller agrees to it. Your bank account will be debited with the required amount once the transaction is complete. You will simultaneously get the shares in your DEMAT account.
People should be aware that there are particular requirements when opening a DEMAT Account.
- Bank Account
- Proof of Address
- Proof of Identity
- PAN Card
- Canceled Cheque
- A Stockbroker
Advantages and Disadvantages of Investing in Equity Shares
Advantages:
Potential for High Returns: Over the long term, equity shares have the potential to produce high returns. If the business does well and its stock price rises, you as a shareholder can profit from capital appreciation. Additionally, businesses may pay shareholders dividends as an additional source of income.
Ownership and Participation: Equity share purchases give you ownership in the business. By exercising your voting rights, you have the right to take part in the company’s decision-making procedures as a shareholder. This enables you to participate in the selection of the board of directors and to have an impact on significant business decisions.
Liquidity: Typically, equity shares are traded on stock exchanges, giving investors liquidity. When needed, you can quickly convert your investment into cash by buying or selling shares. This liquidity offers adaptability and the capacity to respond to market circumstances.
Portfolio Diversification: Your holdings are more diversified when you include equity shares in your investment portfolio. You can spread your risk by investing in shares of various businesses from various industries. In addition to potentially improving overall portfolio returns, diversification can lessen the impact of subpar performance by a single business or industry.
Inflation Hedge: Equity shares have historically served as an inflation hedge. Over time, inflation reduces the purchasing power of money, but the value of stocks has a history of rising along with inflation. Equity share investments may help shield your money from the effects of inflation.
Disadvantages:
Volatility and Risk: Share prices may experience large short-term swings due to the high volatility of equity markets. Equity share values are susceptible to changes in the market and economic conditions, which could lead to losses. There is no guarantee of returns when investing in equity shares, and there is a certain amount of risk involved.
Market Uncertainty: Equity markets can be impacted by market sentiment, the state of the economy, and geopolitical events. Market uncertainty can increase volatility and make it difficult to forecast the performance of specific stocks or the market at large. Market alterations and potential downturns must be anticipated by investors.
Lack of Control: You have little influence over the business’ operations and decision-making as a minority shareholder. Majority shareholders and the management team have significant influence, and their choices might not always be in your best interests. It’s crucial to monitor companies’ performance and conduct in-depth research on them.
Dividend Uncertainty: Dividend payments are not guaranteed, despite the possibility of receiving them from equity shares. Earnings may be retained by companies for reinvestment or applied to other financial priorities. Companies may reduce or stop paying dividends during difficult times, and dividend payments can fluctuate.
Information Overload: Maintaining knowledge of the businesses in which you have stakes, as well as market trends and economic indicators, is necessary when investing in equity shares. It can take a lot of time and effort to analyse financial statements, news, and other types of information. Investors must invest time and effort in their monitoring and research.
What are the Alternative Investment Options?
Real Estate: Purchasing homes, businesses, or rental properties is a component of real estate investing. Investments in real estate have the potential to increase in value and generate rental income. Real estate investment trusts (REITs), which are publicly traded businesses that own and manage properties with an income stream, are another option for investors.
Commodities: Agricultural products, metals, oil, natural gas, gold, silver, and other tangible goods and raw materials are examples of commodities. Futures contracts, exchange-traded funds (ETFs), and direct investments in commodity-related businesses are all ways that investors can get exposure to commodities.
Hedge Funds: Privately managed investment funds known as hedge funds use a variety of strategies to produce returns. These funds are typically restricted to accredited investors and have higher minimum investment requirements. To possibly achieve higher returns, hedge funds can employ leverage, short-selling, derivatives, and other sophisticated investment strategies.
Private Equity: To increase a company’s operations and profitability, private equity involves making investments in privately held businesses or taking part in the acquisition of publicly traded businesses. To purchasing, managing, and ultimately selling or exiting these investments, private equity funds pool money from accredited and institutional investors.
Venture Capital: Investments in early-stage businesses with significant growth potential are made with venture capital. Venture capital firms finance start-ups and new businesses in return for equity ownership. Although there is a greater risk involved, this type of investment has the potential to generate sizeable returns if the invested companies are successful.
Infrastructure Investments: Public infrastructure projects like roads, bridges, airports, and utilities are funded through infrastructure investments. Infrastructure funds, which concentrate on creating, acquiring, and maintaining infrastructure assets, allow investors to get involved. Investments in infrastructure frequently provide steady cash flows and long-term returns.
Factors You Must Consider Before Investing in Equity Shares
Financial Goals: Your financial objectives and goals for investing in equity shares should be clearly stated. Decide if you’re seeking steady income from dividends, long-term capital growth, or a combination of the two. Your objectives will aid you in selecting the best stocks and investment methods.
Risk Tolerance: Determine your level of comfort with potential changes in the value of your investment by evaluating your risk tolerance. Equity shares can have volatile values and are inherently riskier than other types of investments. Consider your capacity to withstand changes in the market and possible losses.
Investment Horizon: The amount of time you intend to hold the equity shares is known as your investment horizon. Long-term investors who can withstand short-term market fluctuations are typically better suited for equity investments. Equity shares might not be the best choice if you have a short-term investment horizon.
Company Analysis: Do extensive research on the business you intend to invest in. Assess the management team’s performance, management team effectiveness, growth prospects, and competitive position. To learn more about the company’s fundamentals, examine its financial statements, annual reports, and other information that is available.
