Equity shares are a popular investment strategy amongst investors. The very reason behind this popularity is the huge returns the equity shares offered. Equity shares are issued to public investors to earn capital for business expansion. Many organizations source the majority of their money from public investors. Let us understand the meaning of equity shares and how one can benefit from them in the long run.
What is The Meaning of Equity Share?
An equity share, normally known as an ordinary share, is part ownership where each member is a fractional owner and initiates the maximum entrepreneurial liability related to a trading concern. These types of shareholders in any organization possess the right to vote.
Companies launch their equity shares to generate a source of capital. These shares are made available to public investors and are non-redeemable. When investors buy these shares, they get the right to vote, share profits, and claim a company’s assets. As an equity shareholder, the investor also receives dividends from the company.
Features of Equity Shares Capital
- They are permanent in nature.
- Equity shareholders are the actual owners of the company, and they bear the highest risk.
- Equity shares are transferable, i.e., ownership of equity shares can be transferred with or without consideration to another person.
- A dividend payable to equity shareholders is an appropriation of profit.
- Equity shareholders do not get a fixed rate of dividend.
- Equity shareholders have the right to control the affairs of the company.
- The liability of equity shareholders is limited to the extent of their investment.
Types Of Equity Share Capital
Ordinary shares
These shares are issued to generate capital that can meet long-term expenses. Shareholders get the right to participate in management segments and other company operations. Investors with the majority of such shares gain substantial voting rights.
Preference equity shares
Preference equity shares assure the payment of a cumulative dividend to investors before ordinary shareholders. On the other hand, preference shareholders lack common shareholders’ voting and membership rights.
Preference shares are classified as participating or non-participating. Investors who purchase participation preference shares get a specified amount of profits and bonus returns. These benefits are subject to the company’s success in a specific financial year. Non-participating equity shareholders do not get any such benefit.
Furthermore, preference shareholders receive repayment of capital when the company is dissolving or winding up its business.
Bonus shares
These shares are issued to the investors as additional stakes when the company generates profit. However, bonus shares do not increase a company’s total market capitalization value.
Rights shares
A company offers these shares to certain investors at a discounted price, which will grow the stake in the respective business. An organization offers shares to rights for a specific time until the required finances are generated to suffice the company’s expenditures.
Advantages of Equity Shares
- High risk, high reward : High-risk factors accompany equity shares. But the higher the risk greater the returns offered by equity share investment. When the company makes profits, investors benefit through dividends offered by the company.
- Easy and efficient : An investor can invest in the equity market with the help of a stockbroker or financial planner. Investors can invest in equities of any company of their choice using a Demat account. A Demat account enables easy and efficient trading transactions.
- Diversity : Investors can create a diverse investment portfolio by investing across the company’s equities from various sectors or industries. Diversification offers you exposure to equities of multiple sectors and creates a balanced portfolio that offers stable returns in the future.
Disadvantages of Equity Shares
- Company’s Performance : The performance of the share largely depends on the company’s performance. When the company is not performing and cannot make profits, the equity shareholder will not receive any dividends.
- Capital Loss : Since equity shares are high-risk, high-reward investments, the probability of capital loss is also high. Due to many internal and external factors, the share price fluctuates. A negative impact may lead to a capital loss for the investors.
- Volatility : Volatility in share prices can be for many reasons. The market sentiments drive the share prices up and down. Timing the markets is an impossible strategy to adopt. The share prices fluctuate within seconds and microseconds.
How to Buy Equity Shares?
To invest in the equity market, you need the following accounts –
- Demat Account – To hold the shares and securities in Electronic form
- Trading Account – to buy or sell shares and place orders you need a trading account registered with stock brokerage firm
- Linked Bank Account – You can invest in The Equity market via IPO or Form the secondary stock market
- Through IPO – Before the company gets listed on the exchanges it launches its IPO. IPO is a way to make the company equities available to public investors. You can place bids for an IPO through stock exchanges or apply to buy specific shares through your net banking account.
Open a Demat account with us and start your investment journey today!
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