- You have definitely heard of the investors and the traders on the Dalal Street or the Wall Street in the movies.
- If you know about them, then you should be familiar with the names such as stocks.
- An equity share is nothing but a stock, and you can think it as a fancy, more sophisticated way of saying a stock.
What are equity shares?
- Equity shares is also known as stocks, or just shares are the type of financial security that will denote ownership in the company.
- In simple words, equity shares are like the parts of the company.
- So, when an individual will purchase the equity shares, they will become the shareholder or owner of the company.
- By owning the equity shares, investors have got the potential to participate in the growth and profitability of the company.
- They also gain voting rights and will also have a claim on the assets and earnings of the company.
- The company will do this so as to raise the capital to expand the business operations and undertake new business projects.
Features of the Equity Shares
Ownership and voting rights
- Equity shareholders have a right to vote on important corporate decisions and are also considered co-owners of the business.
- They also have the right to cast their votes on issues including the election of the directors, corporate mergers and acquisitions, and constitutional amendments.
Dividend income
- Dividends are paid to the equity shareholders and also represent a portion of the profit of the company allocated to the shareholders.
- Based on the performance of the company and the determination of the board of directors, dividends are paid.
Residual claims
- Equity shareholders have a residual claim on the assets of the company in the case of liquidation.
- The residual assets are allocated to the equity shareholders after fulfilling the claims of the creditors and the preference shareholders.
Limited liability
- Equity shareholders are only liable for the amount they have invested in the shares.
- Shareholders are not personally responsible for the debts of the company in the events of financial troubles.
Also Read: What are the types of equity trading accounts?
Types of Equity Shares
Common shares
- These are the most common kind of equity shares that the company will issue.
- Regular equity shareholders are entitled to dividends and other ownership perks, as well as voting rights.
Preference shares
- In terms of dividend payments and capital repayment in the event if liquidation, preference equity shares have a preference over the regular shares.
- Preference shareholders will not have voting rights.
Bonus shares
- Bonus equity shares are issued from the retained earnings of the company.
- These are then divided among the investors as a new ownership interest in the business.
Benefits of Investing in Equity Shares
Potential for capital appreciation
- Equity shares offer the potential for capital appreciation because the value of the shares might rise over time.
- When a business will go well, there may be a rise in the interest in buying its shares, which will also raise the prices of the shares.
Dividend income
- Equity investors have the chance to earn consistent dividend income.
- A business may pay a portion of income as dividends to its shareholders if it will continuously make the profit.
Portfolio diversification
- Equity shares can be used to diversify one’s investing portfolio.
- Investors can also spread the risk and potentially obtain greater total returns by purchasing the shares of a variety of business operating in diverse industries.
Outpaces inflation
- Equity shares have historically demonstrated the potential to outperform inflation in the long term.
- Thus, investing in the equity shares can be a way to preserve and grow wealth in real terms in an inflationary setting.
Conclusion
Equity shares give the investors a chance to be a part of the journey and success of the business.
Frequently Asked Questions (FAQs)
Q1) What is equity in simple words?
It will represent ownership or the value of that ownership in a company or an asset.
Q2) Is it good to buy equity shares?
Investing in the equity stocks can be beneficial due to their potential for high returns and dividend income.
Q3) Is equity better than stocks?
Equity is comparatively riskier because it will involve more than just stocks.
Q4) What is the difference between shares and equity?
Shares are the individual units of the ownership of the company, whereas equity will refer to the total ownership stake in the company.
Q5) What is the full form of NAV?
The full form of NAV is Net Assets Value.
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