What is an Equity Share? Factors You Should Consider Before Investing in Equity Shares
What is an Equity Share: Overview
Investments are made to generate returns. Anyone who is investing in a market has the same purpose which is generating returns and maximizing wealth. But before investing your money into any kind of instrument you need to know about that particular thing. Let's say you're investing in equity shares then you should know the equity share meaning, the features of shares, the advantages of equity shares, and many such things like that. This article will help you clear all your doubts, you're having in your mind regarding equity shares.
Meaning of Equity Shares
Before moving further we will discuss - what is an equity share explain its features
Equity Shares are non-redeemable in nature and are issued to the public at large. It is a long-term source of financing for companies. Equity shares are also known as ordinary shares where each equity holder gets fractional ownership in a company. Investors in equity shares hold the right to share profits and vote and can also claim the assets of the company.
What is an Equity Share: Features of Equity Shares
- Equity Shareholders are entitled to extra profit earned by the company. This helps them increase their returns and maximise their wealth in the stock market.
- Equity Shareholders are entitled to trade their shares in the secondary market. Suppose the value of the company is falling then we as an equity shareholder can trade our equity shares with other investors in a market.
- Equity Shares have a right to make decisions by giving votes in important matters of the company.
- Equity shares are transferable and also entitled to the dividends of the company.
Types of Equity Shares
As we have discussed what are equity shares and their features. It is time to know the types of equity shares:
- Authorised Share Capital - It refers to the maximum amount of capital a company can issue. This amount can be altered and changed by following a few formalities.
- Issued Share Capital - It refers to the amount of capital that is issued by a company to its shareholders.
- Subscribed Share Capital - It refers to the portion of issued share capital which are subscribed by the shareholders of the company.
- Paid-up capital - It refers to an amount of subscribed capital that is paid up by existing shareholders of the company.
- Bonus Shares - It refers to a situation when a company decided to give dividends by splitting the stock between its shareholders.
- Right Share - It refers to equity shares that are issued to existing shareholders of a company having some rights attached to it.
For example - The right to buy at a low price.
Sweat Equity Shares - It refers to equity shares that are issued to employees of the company who are performing well during the course of business.
What is an Equity Share: Advantages of Investing in Them
Following are the advantages of equity share:
- Equity shareholders possess a right to vote in important matters regarding the business of the company.
- Without any extra charges, equity shares can be easily circulated over the assets of an enterprise.
- Equity shareholders are entitled to the high dividend as the rate of dividends is not fixed here.
- Equity share is act like a hedge against inflation.
- As an equity shareholder, you can diversify your portfolio by investing your money in different sectors.
- As an equity shareholder, you are entitled to ownership and profits in a company.
- Equity shareholders are entitled to pay back as it is a perpetual source of funding.
What is an Equity Share: Disadvantages of Investing in Them
Following are the disadvantages of equity shares:
- If any company is not performing well then shareholders are not entitled to any dividends or profits.
- Market volatility makes equity shares a risky option for the shareholders who have a low-risk appetite.
- In case of dissolution of the company, equity shareholders are entitled to get their capital at last.
How to Invest in Equity Shares?
To buy the equity shares you need the following:
- Demat Account - If you want to start your investing journey in the stock market then first and foremost you need a Demat Account and all your KYC documents should be verified.
- Trading Account - To place an order in the stock market you need a trading account. Simply said if you want to buy or sell your stock you need a trading account.
- Linked Bank Account - If you want to start trading or investing in the market you need a linked bank account with your Demat and trading account.
After going through all the processes you have two options to invest as an equity shareholder of a company:
- IPO or Primary Market - In the case of an Initial Public Offer (IPO), you have to invest directly into the shares issued by itself. IPO refers to a situation where companies require funds and thus they issue shares in the market. It is the first time when a company comes up with a share.
- FPO or Secondary Market: In the case of Follow on Public offer (FPO), you trade in stocks from other shareholders available in a market. Here the transactions are between the existing shareholder of the company to another shareholder available in a market.
Factors you should consider before investing in Equity Shares
- Risk Appetite - Before picking any stocks you should know your risk appetite. If your risk appetite is low go for less volatile equities.
- Investment objective - If your strategy is to earn daily return go for intraday trading. Whereas if you are planning to invest for long period then choose long-term investing.
- Amount of capital - If you are someone who has a huge amount of capital then you should go for blue-chip stocks as most of them are profitable in a long run.
Conclusion
Look equities are the great and most common instruments through which investors are making returns. But investing in equities is subjected to market risk. So before investing in any kind of shares or a company, do your proper analysis and research.
How to invest in equity shares?
You just need a bank-linked Demat account and your all KYC documents should be verified if you want to start investing in equity shares of the company.
Which is better equity or debt instruments?
If you are someone who prefers long-term investing then you should go for equities. Whereas if you are a short-term investor go for debt securities.
Equity shares: are they a significant investment?
The main benefit of investing in stocks is the chance that the worth of the money invested will go up. This takes the shape of dividends and capital gains. Equity shares give investors a way to make a diversified investment for a minimum amount of money.
How are equity mutual funds different from equity shares?
Mutual funds and equity shares are the most prevalent investment vehicles in the financial market. When you invest in equity shares, you are dealing actively in stock markets, however, when you invest in mutual funds, a skilled fund manager invests your money in either equities funds or debt funds.
What drawbacks are there to equity shares?
Equity shares have several drawbacks:
- Investors are not liable for dividends or profits if a company is not operating profitably.
- Equity shares are a risky investment for investors with a poor risk tolerance due to market volatility.
What are the benefits of equity?
Dividend Income, Profit Potential, Exercise Control, Potential returns that tackle inflation, Diversification of Portfolio, Right Over Assets and Income, etc. are some of the benefits of investing in equity shares.
Why do investors favour equity shares?
One of the key benefits of investing in equities shares is liquidity. The quantity of shares traded on the stock exchange is called liquidity. You have the choice to sell a company's shares as soon as you buy them on the market. Hence, investors prefer to invest in equity shares.
What are the different types of equity shares?
The different types of equity shares are- preference shares, ordinary shares, rights shares, shares, employee stock options, and sweat equity.
What types of investments do wealthy people make?
Highly affluent individuals often invest in assets like land, gold, private and commercial real estate, and even works of art. To offset the volatility of stocks, real estate remains a favoured asset type in their portfolios.
Why are equity shares redeemable?
Redeemable Shares are shares of stock that the issuing corporation may repurchase on or after a particular date or after a particular event. These shares include a built-in call option that permits the issuer to convert the shares into cash at a specific time.
How does one go about purchasing equity shares?
To invest in the equity share in the stock market, you can open a Demat and trading account with a brokerage company. Alternatively, you can speak with a financial expert who will advise you on what to buy before you acquire the funds. Purchasing equity funds directly from a fund company is an additional choice.
Equity shares or preference shares—which is suitable?
Shareholders of equity are not entitled to receive unpaid dividend arrears from prior years. It is possible to convert preference shares into equity shares. Preference shares cannot ever be converted from equity shares. Compared to equity shareholders, preference shareholders are less at risk, making preference shares a good option.
What factors have an impact on equity?
Several variables, including dividend per share, share price, dividend growth rate, beta, risk-free return, and predicted market return, can impact the cost of equity.
What is a bonus equity share?
Bonus equity shares are extra shares issued to current owners at no additional cost based on how many shares they currently possess. These are the company's accumulated earnings that are converted into free shares rather than distributed as dividends.
What factors increase the cost of capital with equity shares?
Several variables, including dividend per share, share price, dividend growth rate, beta, uncertainty return, and predicted market return, can impact the cost of equity. Danger, risk of inflation, risk of exchange rate fluctuations, and other factors might influence the cost of capital.