What are Equities? Types Features and Advantages of Equity Shares | Espresso

What are Equities/ Equity Shares?

Shares are believed to offer the best potential returns on investment. The shares traded in the share market are equity shares. But, what are equity shares? What is their worth? Why are they traded in the share market?

 

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In this article, we will look at understanding the meaning of equity shares and aspects that you need to know to start trading.

What are Equities or Equity Shares?

A company can raise funds by adding partners and issuing shares. There are different types of shares that a company can issue and confer specific rights on shareholders. Broadly, shares can be categorized into two types – equity and preference.

Equity shares are issued by a company to the public for raising capital for its business. The company offers voting rights to equity shareholders and also declares dividends to offer them a share of the profits made by it. While some companies may decide to reinvest the profits into their business, shareholders can gain from increased profits of the company in the future. Also, equity shares are the most common shares traded in the market.
Also Read: Cumulative Preference Shares

The salient features of equity shares can be summarized as:

  • Equity shares confer voting rights on the shareholder. This means that equity shareholders can be a part of company meetings and vote on important issues. In practice, though, company decisions are left to the Board since the equity shareholder base is highly fragmented.
  • Equity shareholders can receive a share of the profits made by the company if it decides to declare dividends. However, they are not liable for the debts or loans of the company. The only negative impact they can feel is a drop in the value of shares if the company’s debts increase.
  • Equity shareholders can claim money from the company only when it liquidates. This is after the company has paid off all its liabilities.
  • Shareholders can trade equity shares on the stock market. The market price of the share depends upon its demand and supply and the overall investor sentiment.
    Also Read: How to earn Profit in Share Market?

 

Pros and Cons of investing in Equity Shares

Here are some advantages of investing in equity shares:

  • Investing in equity shares offers you an opportunity to earn high returns. Since the price of a share is determined by its demand and supply, if the demand for the shares of a company increases, its price rises too. This offers a chance to earn high potential returns. You can also earn regular income if you are holding shares of companies that declare regular dividends.
  • Investing in equity shares is easy. All you need is a trading account, a Demat account, and a linked bank account to get started.
  • The stock market is impacted by social, political, and various macroeconomic factors. You can diversify your investments by buying shares of companies across various sectors.

Equity investing comes with certain risks, as highlighted below:

  • Since the price of the share is determined by the market sentiment, there is a risk of losing money due to unforeseen factors.
  • Share prices are known to be highly volatile. Also, they can take any direction at any time. This can be overwhelming for investors with a low tolerance to risks.
  • If the inflation rate increases and the company experiences a drop in worth, then its share prices can be negatively impacted too.
  • If the company is unable to repay its debts, then it may face liquidation and cause shareholders to sell their shares at a low price.
  • Any change in the political or social environment of the country can impact the company and the stock market and cause share prices to drop
    Also Read: What is Face Value of Share?

Share Market Knowledge Centre

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Frequently Asked Questions

Equity shareholders have voting rights in company issues. However, since these shares are being constantly traded in the market, most company decisions are taken by the Board of Directors. However, if a shareholder has a substantial equity holding, then he/she can avail of ownership benefits.

There are various types of risks associated with investing in equity shares:

  • Market Risk: As an equity share investor, you want to buy the stock at a lower price and sell it when the price is high. However, if the price of the said share falls, then you can book a loss.
  • Company Risk: If the company faces any problem, then its stock price can take a hit.
  • Liquidity Risk: If the company has liquidity problems, then it can cut back on dividends. This can adversely affect its stock price too.
  • Interest Rate Risk: If the government increases interest rates, then the company will have to pay more interest on loans. This can eat into its profitability and impact stock prices.
  • Inflation:Increasing inflation rate results in an increase in the cost of raw material that can reduce the profits of a company and negatively affect its stock price.