Equity shares and its types: When you read the word “stock market”, your mind, like most people, instantly thinks of one thing – shares. Specifically, equity shares. This should be expected, as equity shares are one of the most popular and well-known investment choices today. Equity shares are one of the few investment options that allow you to own a fraction of the company. This makes every investor a part owner of the company. As part owners, the company will do everything possible to improve shareholder value, as they must work for the investors.
Read on as we cover everything there is to equity shares, such as their meaning, how it works, pros and cons, and equity shares and its types.
What Is Equity Shares?
To raise money, a company issues its shares on a registered stock exchange, while reducing its ownership in the company. These shares can be bought and sold on the stock exchange, either for trading or investing. The investors who buy the shares become part owners of the company, and their capital goes towards the total capital of the company in the Initial Public Offering (IPO).
Also Read: What Do You Mean By Debt And Equity Market?
How Do Equity Shares Work?
Equity shares represent part ownership of a company. Each share held is a portion of the company that gives them certain rights and privileges like voting rights, bonus shares, dividends, and capital gains. The size of ownership depends on the number of shares held by an investor. But why would a company willingly dilute its stake in the company?
The main reason why companies go public in exchange for selling their stake is for expansion. To do that, they need funds, and the cost of borrowing a huge sum of money is not feasible in the long term. Another reason is that certain stakeholders of the company will be looking to exit their investment in the company, and an IPO would allow them to do that.
Equity Shares and Its Types
- Ordinary Shares;
These are the most common types of equity shares. Companies issue ordinary shares to meet their goals of expansion and debt in exchange for issuing these shares. The investors who buy these shares get voting rights and ownership based on the number of shares held.
- Preference Shares:
For conservative and risk-averse investors, preference shares are an ideal equity investment. They are prioritized over ordinary shares in terms of dividend payments, at the price of not having any voting and membership rights. Another benefit is if the company is under liquidation, the preference shareholders are eligible to receive repayment of capital.
- Rights Shares:
A listed company can raise more capital, even after it has gone public. Through rights issues, the company offers additional shares to a certain number of shareholders at a discount from its current price. Only those few investors get to raise their stake in the company. Rights issues are optional, meaning existing shareholders have the right, and not an obligation, to participate in the issue.
- Bonus Shares:
When rewarding shareholders, companies usually pay them a dividend, or issue bonus shares. A bonus share is issued by a company from its retained earnings to shareholders. Keep in mind that bonus shares don’t add value to the market capitalization of the company.
- ESOPs (Employee Stock Ownership Plans):
Companies don’t just reward their investors. They also consider the importance of their workforce and allow them to buy their company’s shares at a fixed price. ESOPs programs are designed to improve morale among employees and retain a talented workforce. ESOPs give employees an incentive to stay with the company, as well as work harder to improve their performance as well as the company’s.
- Sweat Equity/Founders Equity:
Founders, directors, and top-performing employees receive sweat equity shares. They are given these shares at a discounted rate, on account of their exceptional performance and value added to their company.
Features Of Equity Shares
- Voting Rights:
What makes equity shares so important is that they carry voting rights. These voting rights have the authority to sway a business decision in either direction. This includes the power to choose an effective management, who would improve shareholder value.
Apart from capital appreciation, another way shareholders are rewarded for their investment is through dividends. Dividends are the profits of the company that get distributed to all equity shareholders in proportion to how many shares they hold. But dividends are not compulsory, and companies can choose not to pay dividends to shareholders.
Equity shares with decent volatility are very liquid and can be sold and converted into cash quite easily. By being listed in the market, they endure volatility which makes liquidity less of a concern.
- Return On Investment:
Equity shares have unlimited potential for profits and a loss limit of investors’ entire wealth. Very few investment options carry this range of potential for profits and losses.
Equity Shares: Advantages And Disadvantages
Here are some of the advantages of investing in equity shares:
- High Returns:
Equity shares have the potential to give immense returns over time. This could be because equity shares are high-risk instruments. The high returns are what motivate most investors to take the risk, instead of entering into low-risk and conservative investment options.
- Voting Rights:
Ordinary shareholders have voting rights that give them the right to vote for or against the company’s corporate policy and business plans.
Equity shares are actively traded on the stock exchange. This makes buying and selling them quite easy, as there are always buyers and sellers in the market.
The reason high returns are possible with equity shares is because of the constant price volatility in the market. Volatility can work both ways, and it is difficult to predict the direction of a share price with absolute certainty.
- Performance Dependent:
Revenue growth, profits, and competition have a direct effect on the stock price of the company. The price movement of the equity share of the company is completely reliant on the company’s performance. A bad performance, scandal outbreak, risk, or bankruptcy all have an effect on the share price.
- High Risk:
Equity shares are high-risk high-return. Unfortunately, people forget to focus on the high-risk factor. It is never advisable to invest in equity shares if you cannot risk the money you’re investing. There have been cases where shares have lost 99.9 percent of their value, decimating investors’ savings and wealth in the process.
Equity shares and its types are one of the most fascinating concepts in the stock market. Irrespective of your goal of being an investor or making a career out of equities, Join Fingrad has the solution to your learning needs about the markets. Happy Investing!
1. Who can issue equity shares?
Equity shares can be issued by public companies that are listed on stock exchanges, as well as by private companies through private placements or initial public offerings (IPOs).
2. How to buy equity shares online?
To buy equity shares online, you can follow these general steps:
Step-1: Open an online trading account with a brokerage firm,
Step-2: Complete the necessary documentation,
Step-3: Deposit funds into your account,
Step-4: Research and select the desired equity shares,
Step-5: Place a buy order through the online trading platform provided by your broker.
3. What is difference between equity and share?
Equity refers to the ownership interest in a company, representing the residual value after deducting liabilities. Shares, on the other hand, are the units into which the ownership of a company is divided. Equity represents the overall ownership, while shares represent the specific portions of that ownership held by individuals or entities.
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