Equity shares represent stakes in a company’s ownership that investors can acquire. If the company performs well, so does your share. It’s a win-win for both the company and you.
Similarly, with Sensex’s CAGR (compounded annual growth rate) of 12% over the last ten years, that same ₹10,000 would have grown into ₹23,108 by now.
Whether you’re looking to make your first investment or simply trying to understand what it is about, this guide to equity shares is your starting point. Let’s dive in.
What is equity share? A brief overview
Equity shares meaning:
Primarily, a company has two channels for obtaining capital. The first is through debt, a straightforward arrangement where the company borrows money and commits to pay it back with interest.
This borrowing often manifests in instruments such as debentures, where the firm issues a promise to repay the borrowed amount at a specified interest rate.
The alternative to debt is equity financing. This is where the concept of equity shares emerges. When a company issues equity shares, it’s essentially offering portions of its ownership to the public.
Investors who purchase these shares are buying into the company, acquiring a stake. In return, the company obtains the necessary capital without accruing debt.
The company issues these equity shares to the general public through an Initial Public Offer (IPO). An IPO is the primary market offering. By subscribing to an IPO, you’re expressing interest in purchasing these shares.
After being allotted post-IPO, these shares are listed and traded on the NSE (National Stock Exchange) and the BSE (Bombay Stock Exchange) in India.
Its face value or book value can describe the worth of an equity share. The price of shares is similar to a seesaw. If people buy more shares, the price goes up; if they sell, the price goes down. Hence supply and demand determine their price.
Investors buy shares in growing companies for potential profits but sell shares in struggling companies to avoid losses. This buying and selling cycle is what drives the stock market.
Types of equity shares:
|TYPES OF EQUITY SHARES
|As per definition
|As per returns
1. Direct rIght shares
2. Standby or
insured rights shares
When a company decides to raise capital through equity shares, various types of equity shares are available to cater to the needs and preferences of both the company and investors. Here are the major types of equity shares:
When companies seek to raise capital, they often turn to issuing ordinary shares. Holders of ordinary shares get a piece of ownership in the company, often with voting rights that allow them to influence key company decisions.
These shares are a bit special. Preference equity shares are mainly issued to guarantee the payment of a fixed or cumulative dividend before any dividend is paid to ordinary shareholders. The key difference? They usually don’t come with voting rights like ordinary shares.
These shares act like a gift from the company you invested in. If a company has accumulated substantial earnings, instead of paying it all out as dividends, it might issue bonus shares from these retained earnings.
It means shareholders get added stakes in the business without additional cost. These shares don’t increase the company’s overall market value; they merely capitalise on the profits already earned.
If a company feels generous towards its existing shareholders and wants to raise some quick capital, it might offer rights shares. These shares are offered to current shareholders at a special, often discounted price.
In this way, they can increase their share of the business. The catch? This offer stands only for a limited period.
Core features of equity shares
- Voting Rights: Equity shareholders are given the privilege to vote on pivotal company decisions. The weight of their vote typically corresponds to the number of shares they hold.
- Dividend Payouts: While dividends aren’t guaranteed, equity shareholders are in line to receive them. The payout depends on the company’s performance and financial discretion.
Also read: Dividend Rate vs. Dividend Yield
- Participate in meetings: Holding equity shares gives individuals the right to attend annual and general meetings. It helps them to voice out their opinion and also be informed.
- Permanent Nature: Equity shares represent a long-term commitment. They remain non-redeemable until the company decides to wind up its operations. Shareholders can either choose to sell their shares in the market or retain them for potential future value.
Why do investors love equity shares?
- Potential High Returns: Equity shares offer the chance for significant capital appreciation. As a company performs well and demand for its shares grows, the stock price can also rise, giving investors opportunities to grow their investments.
- Regular Income: Dividends from equity shares can act as an additional source of income. While not guaranteed, companies that consistently declare dividends offer a predictable return.
- Liquidity: Equity shares are bought and sold on stock exchanges, making it easily accessible and liquid. This means investors can quickly convert their shares into cash, facilitating easy entry and exit.
- Hedge Against Inflation: With inflation reducing the value of money over time, equity shares, historically, have the potential to offer returns that surpass inflation rates, thus preserving and even enhancing the buying power of investments.
- Diversification: Investing in equity shares allows for diversification. It helps spread the risk by investing in different sectors, to create a balanced portfolio.
Challenges and considerations in equity investing
Investing in equity requires careful consideration due to inherent challenges.
- No assured returns: Unlike some other investment avenues, equity shares don’t guarantee returns. A company’s performance, overall market conditions, and even global events can impact returns.
Sometimes, even if a company performs well, market sentiment might not favour it.
- Risk of capital loss: Investors are always at risk of a capital loss. If you invest ₹10,000 in a share priced at ₹100 each and its price falls to ₹80, your investment value reduces to ₹8,000. While the hope is that share prices rise, due to unforeseen circumstances, they might drop.
- Market volatility: Another challenge is market volatility. As the prices of equity shares can fluctuate dramatically due to numerous factors, it creates unpredictability making equity investments both an opportunity and a challenge, demanding careful strategy and constant vigilance.
Also read: At what age can you invest in stocks?
Equity shares provide an avenue for both companies and investors to meet their financial goals.
For businesses, they present an alternative to accruing debt, allowing them to raise capital while offering a piece of their ownership.
For the investor, they present avenues for potentially high capital growth and dividends.