What are Equity Shares? Meaning, Definition, Features

Many of us feel that investing in the stock market is very difficult and demands vast knowledge. However, a dissection of the fundamentals of dealing in publicly traded companies can offer a thorough knowledge of buying shares.

Investors frequently use equity shares as a kind of investment. The enormous gains provided by equity shares are the main factor behind its popularity. Equity shares are issued to the general public to raise money for corporate growth. The major part of the funding for many companies comes from public investors.

So, let us understand what is Equity Shares, its risks, features, types, and how equity shares can reward us in the long term.

Equity Shares Meaning

Before getting into equity shares, let’s understand the equity meaning. Equity, in simple terms, is the part of the company’s ownership, which is distributed through equity shares to different investors.

Equity shares, often known as stocks, are a source of long-term financing for a business. Investors receive equity shares from a business in exchange for a portion of the company’s ownership.

When you buy equity shares in a firm, you become a shareholder and have voting rights over the management of the business. Additionally, the company pays dividends to its equity stockholders to distribute its earnings.

Who Would Buy Equity Shares?

Equity shares are a terrific investment for people who want to grow their money. Investors can sell their shares to make big profits when their value increases. Another reason one should invest in Equity shares is to fight rising inflations as returns are diminishing everywhere, whether it is fixed deposits or any other mode of investment.

In simple words, it is the way to earn maximum profits in a limited time by purchasing shares of a company.

Types of Equity Shares

Ordinary Shares:

In order to cover long-term expenses, money is raised by issuing shares. Shareholders have the right to participate in management decisions and other business activities. Therefore, significant voting rights are granted to shareholders who own most of these shares.

Preference equity shares:

Before returns are divided among regular shareholders, preference equity shares are typically issued to investors as an assurance of the payment of accumulated dividends. The right to vote for holders of preferred equity shares is prohibited.

Bonus Shares:

These shares are issued to investors as a bonus or extra shares when the company earns extraordinary profits. It is a type of reward to the investors who trusted the company and invested.

Rights Shares:

Certain shareholders are provided with these shares at a reduced price, thus increasing their ownership in the corresponding organization. A company grants rights shares to investors for a set period while it raises the necessary funds to cover its operating costs.

Features of Equity Shares

Irredeemable In Nature

Throughout the existence of the company, investors are not given their investment money back. Equity shareholders will either get back their investment when the company closes its operations based on the value of their equity shares, or they may sell their equity shares to redeem them.

Participation in Voting

The ability to vote in elections for general managers and other company officials, apart from being a part of management decisions, is unquestionably the most significant benefit of owning equity shares. This is because the company’s operations directly affect the returns that equity shareholders receive from the company.

Typically, each share represents one vote. It means that if you own more equity shares, you also have higher voting rights.

Participation in meetings

The investor who holds the company’s equity shares is automatically eligible to attend the important meetings of the company. They can give their suggestions in AGMs (Annual General Meetings) and cast votes in favour and against any resolution.

Payment of Dividend

Dividend payments are also available to equity shareholders. Dividend payments to equity owners are not fixed and may change according to the company’s performance and the achievement of specified objectives. Equity stockholders are therefore entitled to dividend payments, although these payouts are not promised.

High Rate of Return

Although equity shares have great risk and volatility, they also promise greater returns. Therefore, investing in equity shares can help you build a sizable corpus with excellent returns if you have higher risk tolerance.

Diverse in Nature

Investors can build a broad investment portfolio by investing in business shares from multiple fields or businesses. By exposing you to stocks from multiple companies, diversity helps you to build a solid portfolio with predictable earnings.

Limitations and Risks of Equity Shares

It is prudent to analyze all the aspects of investment as anything that comes with benefits also have some limitations. It means that equity shares investment doesn’t always produce profitable results.

Although you can make significant profits with equity shares, there is a possibility you could also lose all you invested. Even if it’s not all your investment, you could still suffer massive losses if the business doesn’t make a profit or if the market as a whole is unfavourable.

Let’s understand more in detail the limitations and risks of investing in equity shares:

Capital Loss

The supply and demand for equity shares determine the share price. Shareholders start buying more stocks of a business if they believe it will continue to thrive in the future. The value of the share also rises when shares are purchased in bulk.

In contrast, investors may opt to sell their shares if they anticipate the business will not perform well. This implies that when the share’s demand declines, the share price could also decline.

As a result, if you traded in such shares, a decline in demand could cause your Capital loss.

Volatility

Any fluctuation in the price of a share due to any reason, like, social or political, or for some other reason, is called volatility.

For example, the share price of XYZ company is hovering around ₹160, and the elections happened in the country, and on the results day, it came to ₹80 per share. In that case, you will have to face fluctuation in the value of the share you hold.

Sometimes you can get benefits from volatile shares, but sometimes you also lose money due to sudden fluctuation in the value of shares.

Conclusion

Equity shares are one of the prudent options to make your investments as the shareholder carries the right to vote and is allowed to say in the company’s business operations. However, before deciding on investment in equity shares, ensure you know what an equity share is, how it functions, and any potential risks or Limitations.

It is preferable to select high-quality stocks, and prior to allocating a higher percentage of your investments to equities, you should gain experience in equity investing. Therefore make a wise decision to ensure that your investment produces good returns.