What are Equity Shares? Capital, Market & More

I. Introduction

Businesses can use various funding options when they need capital to support their day-to-day activities or a new business venture. Selling equity shares is one of those options. It helps raise capital and attract investors by promising a percentage of ownership (a share) in the company. Below, we present a comprehensive guide on equity shares. It covers everything from the types of equity shares to the advantages and disadvantages.

A. A brief definition of equity shares

By definition, an equity share refers to the value of the stake or share an investor holds in a company as a return on their investment. The equity shares usually represent the value of shares an investor owns within a company. These share ownerships give shareholders the power to access capital gains and get dividends for the investment in the company.

B. Importance of equity shares in the financial market

Equity shares are important for both businesses and investors. It helps businesses to raise funds for their business needs. On the other hand, it helps investors secure a percentage of ownership in the company to get regular dividends from the company’s capital gain. 

II. Meaning of equity shares

There are different types of equity shares that you can invest in. But before you learn about the types and why you should invest in equities, you must make sense of equity ownership first.

A. Explanation of equity ownership

Equity ownership is a type of ownership an investor earns by investing and purchasing the company equity. It represents the percentage of the company’s stakes. When an investor purchases a share or stake of equity in a company, it is called equity ownership. 

B. How equity shares represent ownership in a company

Companies issue equity shares or stocks to raise capital. They trade them on the share market. These shares contain a percentage of ownership of the company in return for the investment. 

When an investor purchases the equity share of a company they also get a percentage of the company’s stake or ownership. Thus the investors of equity shares are called shareholders of the company.

III. Types of equity shares

There are two primary types of equity shares—common or ordinary equity shares, and preferred equity shares. Below we will discuss these types in more detail.

A. Common shares

A common share is a type of share issued by business owners to the investors as proof that they have paid an amount of money to the company. The investors invest in a company against the shares they have purchased.

1. Explanation of common shareholders’ rights

With common equity shares, shareholders can access various rights in the company. The common share rights may include voting power on serious issues, the right of ownership in the company, the right to change ownership, entitlement of dividends, the right to sue for wrongful acts within the company, and so on.

2. Risks associated with common shares

Common shares also contain several risks, such as high volatility, no guarantee of returns and limited influence over company decisions. Also, when it comes to business liquidity, common shareholders come last after creditors, bondholders, and preferred equity shareholders.

B. Preferred shares

Preference shares or preferred stocks are company shares with dividends. This type of share is paid out to the investors or shareholders before issuing the common stock dividends.

1. Features and benefits of preferred shares

Preferred shares or stocks hold certain features and benefits including higher preference in case of assets liquidation, higher preference during dividends payout, scalability, and no-voting, which can be converted into common shares, and so on.

2. Differences between common and preferred shares

The major difference between common or ordinary equity shares and preferred shares is that common shares come with voting rights and involve a percentage of ownership in the company. However, their dividends are issued after preferred equity shareholders, creditors, and bondholders. On the other hand, preferred shares do not have voting rights but get preference in dividend payouts. They are thus relatively less risky than common shares.

IV. Features of Equity Shares

Equity shares have certain features that make them stand out from other share investment vehicles. Below, we will discuss the primary features of shares in detail.

A. Voting rights

Voting rights are one of the primary features of equity shares. They are reserved for holders of common shares.

1.  Explanation of how shareholders influence company decisions

Voting rights are accepted or granted to the stakeholders or shareholders who own a percentage of the company by purchasing equity shares issued by the company. Through these voting rights shareholders of equity shares can participate in all board meetings and cast their votes during a board of directors selection or any business decision-making. They are, however, only for common shareholders.

B. Dividend payments

Another common feature of equity shares is dividend payments. Companies begin to pay dividends to the shareholders as soon as they begin to profit in business. Here’s how they work.

1. How dividends are distributed to equity shareholders

Dividends distribution of equity shares are mostly paid off in cash via bank transfer. If the corporation or shareholders have reinvestment plans then the dividends will be paid to repurchase shares or issue future shares.

2. Factors influencing dividend payments

The dividend distribution depends on the type of equity share investors purchase. For example, preferred shares get priority when it comes to the payout of dividends. Common share dividends get issued after creditors, bondholders, and preferred shareholders’ dividend payments.

C. Capital appreciation

Capital appreciation in company shares refers to a rise in the market price. It is another crucial feature of equity shares. The capital appreciation of shares represents the rise in the market value of a company’s issued equity.

1. Explanation of how equity shares can appreciate in value over time

Usually, equity shares grow over time in two ways. One is when the equity issuer company begins to pay off its debts resulting in a rise in the equity value. On the other hand, when the company begins to profit in business the value of shares also begins to rise.

V. Advantages and disadvantages of equity shares

Like any other share market investment, equity share investment also contains unique advantages and limitations. Below we will learn about them in detail.

A. Advantages

When it comes to equity share investment it comes with a wide range of advantages including higher returns, ownership in the company, and so on.

1. Potential for high returns

Unlike other stock investments, equity shares come with relatively higher returns on investment as the equity share issued by the company offers a percentage of the company’s ownership. These types of investment plans are usually known to generate higher returns.

2. Ownership in the company’s success

As company-issued shares offer a percentage of ownership in the company the investment gets directly linked with companies performance and investors of equity shares can access the ownership in the company’s success.

B. Disadvantages

Apart from the potential advantages of equity shares, this type of investment also contains several disadvantages or drawbacks.

1. Market volatility

The first and most critical disadvantage of equity shares is that they come with higher market volatility. As equity shareholders directly own a percentage of a company, if the company faces a major loss or goes bankrupt, they have to bear the loss as well as accept the liability.  

2. Lack of fixed returns

Equity shares can offer higher returns if the company performs well, but there is no guarantee of returns so it is possible to gain in lump sum or gain nothing at all.

VI. How to invest in equity shares

When investing in equity shares knowing about the types of equity shares and their pros and cons is not enough. You must also learn to invest in them properly.

A. Steps for individuals to invest in equity shares

Here are the detailed steps you need to follow to invest in equity shares.

• Step 1: Set your investment goals and objectives clear
• Step 2: Determine how much you can invest in equity shares or how much you can afford to risk in equity shares.
• Step 3: Learn about your investment style and risk tolerance level.
• Step 4: Open an investment account (if you want you can get help from a reliable broker).
• Step 5: Identify suitable company equity shares that you want to invest in
• Step 6: Observe their past performance and current market trends and invest
• Step 7: Monitor your investment from time to time and change it according to market scenarios.

B. Considerations before investing in the stock market

If you are interested in equity share investments, you must try to play it safe. Here are a few considerations you need to remember before participating in equity investment.

• Know your investment goals.
• Understand how much you can afford to risk.
• Focus on portfolio diversification.
• Learn about your investment horizons.
• Compare past performance and future potential.
• Check payment policy.
• Learn about the risks associated with the investments.

VII. Conclusion

A lot of people nowadays prefer to invest in equity shares. Equity shares are a type of share the company issues to the investors with a percentage of ownership as proof of payment the investors paid to the company.

A. Recap of key points

Equity shares refer to the company share that holds a percentage of ownership in the company. Equity investors are known as stakeholders or shareholders who have the right to vote and participate in certain internal matters of the company. They also earn from the company’s profit. However, these types of investments also contain higher risk and one should consider all essential factors before investing in them.

B. Encouragement for readers to make informed investment decisions

Like any other investment, equity investments also contain market risks. In fact, they are a high-risk high-return option. So as an investor, you must take all these essential considerations into account to ensure a safe and successful equity investment. Also, keep yourself updated about the latest news of the share market and read resources for additional insights.

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