Equity Shares: Meaning, Types, Features, Pros, and Cons

by Anjali Sharma
13 June 202410 min read
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Equity Shares: Meaning, Types, Features, Pros, and ConsEquity Shares: Meaning, Types, Features, Pros, and Cons
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Introduction

Imagine owning a part of a successful company like Reliance Industries or Tata Motors.

How exciting would it be to participate in their journey and reap the financial benefits of their growth? That’s precisely what equity in share market offers.

This introduction to equity shares, or simply ‘equities’, will unveil the allure they hold for investors, both seasoned and beginners.

Equity Shares Definition

What is equity share? In its simplest form, equity shares represent ownership in a company. As an equity shareholder, you own a proportionate share of the company’s assets and earnings.

This entitles you to a slice of the company’s profits, typically distributed as dividends, and voting rights in company decisions.

It’s no surprise that the question of “what are equity shares?” tops the list of queries for new entrants into the stock market.

Types of Equity Shares

A company issues equity shares to raise long-term capital requirements of the business. In the initial stage, the founders bring the capital and are the sole owners and equity shareholders.

As the business expands, the company requires more funds for operation and expansion. These funds are garnered by various means like business loans, raising debt, funding from investors etc.

Issuing shares to the general public via IPO is a common way of raising money. 

There are two types of equity shares broadly:

Preference Shares

As the name suggests, the preference shares give preferential rights to the owner:

Fixed Dividends: Preference shareholders receive dividends at fixed rate even before profits are distributed among ordinary equity holders. 

Liquidation Benefits in case of Bankruptcy: In case a company goes into liquidation, preference shareholders have the first right on the assets of the company, prior to ordinary equity shareholders.

No Voting Rights: Preference shareholders do not have voting rights granted to ordinary shareholders.

Ordinary Equity Shares

Ordinary shareholders are equity holders other than preference shareholders. They have a right to ownership of the company and its profits and growth.

They receive dividends declared from the profits a company makes, if and when the board of directors decides t distribute part of the profits as dividends.

However, equity holders do not have a say in how much dividends are distributed and when. A company may often redeploy the profits in the company for further expansion.

Ordinary shareholders have voting rights in the company in the proportion of their equity holding. 

Benefits and Features of Equity Shares

Understanding equity shares features is paramount for any investor.

Each feature influences the risk and reward associated with owning equity shares, which, in turn, shapes your investment strategy. Here are the key features of equity shares:

Ownership and Control

Equity shareholders are essentially part-owners of the company. This ownership grants them voting rights, allowing them to influence company decisions during annual general meetings (AGMs) or extraordinary general meetings (EGMs).

For instance, if you hold 100 shares in Tata Motors, and there’s a crucial decision to be made at the AGM, your 100 shares equate to 100 votes.

Dividend Income

Equity shareholders are eligible for dividends, which are a portion of the company’s profits distributed to its owners.

However, dividends are not guaranteed and depend on the company’s profitability and dividend policy.

Successful and profit-making companies declare dividends regularly and can be a good source of income for investors. 

Consider this: in 2022, Infosys, a leading IT company, declared a final dividend of ?15 per equity share. If you owned 1,000 shares of Infosys, you’d receive ?15,000 as dividend income.

Here are some examples of high dividend yielding stocks:

Name
CMP (Rs.)
MCap (Rs. Cr)
Dividend Yield %
Industry
ONGC
156
197510
6.85
Oil & Gas
Coal India
224
138199
9.03
Mining
HCL Technologies
1166
316643
4.11
IT Software
HUDCO
57
11589
6.05
hHousing Finance
Bank Of Maha
27
18266
4.79
Banking

Claim on Assets and Profits

In the unfortunate event of the company’s liquidation, equity shareholders have a residual claim on the company’s assets and profits.

However, their claims are entertained only after settling the dues of creditors, bondholders, and preference shareholders.

Limited Liability

The liability of equity shareholders is limited to the extent of the face value of shares held by them. They cannot be held personally responsible for the company’s debts.

Capital Appreciation

Equity shares have the potential for capital appreciation. If the company performs well and the stock market responds positively, the price of equity shares can increase, leading to capital gains for the shareholder.

A viable business that meets a particular need in the market will grow in terms of market share, revenues and profitability over a period of time.

As an equity shareholder the value of your investment will also increase along with the business.

The upside profit potential and capital appreciation for shareholders is very high making it a great investment avenue for long term wealth creation. 

For example, if you bought shares of MRF in 2013, you would have paid Rs 13,000 per share. In June 2023, MRF Tyre share price touched Rs 1,00,000, almost eight times appreciation in 10 years!

 

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Hedge against Inflation

Inflation, like taxes, is inevitable. Inflation in simple terms is the loss in the value of money over a period of time.

For example, 1 kg sugar costed Rs 3 in 1980, Rs 10 per kg in 2000 and Rs 45 per kg  today. Inflation rate is typically between 4-6% in India and even higher.

Fixed return instruments e.g. savings account returns will yield negative return over a period of time.

Equities offer potential of earning exponential returns since your money is invested in a business which can grow multifold with time.

While most fixed return instruments offer a single digit return, equities have the potential to bring in double digit returns over a long term.

Portfolio Diversification

Out of various asset classes available for investment e.g. fixed income, real estate, bonds, deposits, commodities, gold etc.

Equity shares are an attractive option to diversify your portfolio  with a probability to add high earning potential with moderate to high risk in the long term.

Equity markets are volatile in the short term but over a longer term the risk evens out as companies grow and businesses expand in revenue and profits. 

Risks of Investing in Equity Shares

Volatility

Equity markets are volatile in nature. There are factors beyond the company’s performance that can impact its price.

For example, general health of the economy, global market headwinds, government policies or regulations, industry downturn, recession, Black Swan events like Covid, geo-political situation etc.

can cause sharp fluctuations on the prices of equity shares. A shareholder must have the risk appetite to absorb the short-term volatility and stay invested. 

Negative Return

Unlike other investments like bank deposits, govt investment schemes, real estate or gold, equity shares do not offer any fixed return.

You can even lose your capital and there is no protection offered on equity investment.

Therefore, equity shares have an inherent risk associated with them and investors must make well-researched investment decisions based on their financial goals, time horizon and risk appetite. 

Equity Shares in the Indian Share Market

The Indian share market, comprising primarily the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), hosts a vast array of companies offering equity shares.

The market offers ample opportunities for investors to diversify their portfolios and strive for attractive returns.

In FY2022, the S&P BSE Sensex, a benchmark index of the Indian share market, delivered a return of 19.71%, outperforming many global indices.

This robust performance underscores the potential of equity in share market. From the level of 100 in 1979, Sensex has crossed 63,000 level in June 2023, Sensex has returned a CAGR of 16%.

Rarely any asset class has delivered a return that Indian equity market has given to investors across various market cycles, downturns, adverse events and recession. 

 

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Investing in Equity Shares: The Role of Brokerage Firms

Investing in equity shares requires careful research and planning, and a reliable brokerage firm can make this process smoother and more rewarding. Here’s how:

  1. Research and Advisory Services: Brokerage firms provide distilled information, research reports and investment advice. This data can help investors make informed decisions.
  2. Trading Platform: Brokerage firms offer robust and secure online trading platforms. This allows investors to buy and sell shares at their convenience.
  3. For instance, Rupeezy provides a user-friendly trading platform equipped with advanced trading tools and host of offers for first time investors, like free demat account opening, free equity trading and advance trading features for no extra cost.
  4. Customer Support: Brokerage firms provide customer support to assist investors with queries and concerns.
  5. This could range from helping understand the features of equity shares to troubleshooting technical issues on the trading platform.

How to start investing in Equity Shares

Open a demat account:

Demat account is mandatory for investing in stock markets. Now-a-days you can open a demat account digitally in a few simple steps. Open a free demat account with Rupeezy today.

Trading Account:

For transacting in equity in share market i.e. buy and sell, you need a trading account.

Brokerage firms offer demat and trading accounts with online trading facility, user friendly trading apps and  attractive offers on brokerages.

Install Rupeezy app today and open a demat and trading account in a few easy steps. 

Linked Bank Account:

You need to link your bank account for online trading so that funds are transferred in and out easily without any paperwork or separate login into your bank account for fund transfer. Totally hassle free and quick.

Conclusion

Equity shares offer a gateway into the exciting world of stock market investments, providing both financial rewards and the thrill of being part of a company’s journey.

By understanding what equity shares are and their unique features, you can craft a robust investment strategy.

Partner with Astha Trade, a trusted online brokerage firm, to navigate the stock market and unleash the potential of equity shares.

Begin your investment journey today with Rupeezy and become a pro-trader with user friendly, easy to navigate trading app, free equity intraday trading, trading across segments and advance trading tools.

Key Takeaways

  1. Ownership: Equity shares provide ownership in a company, allowing investors to share in the company’s success.
  2. Dividends and Capital Appreciation: Equity shareholders can earn dividends and potentially benefit from capital appreciation.
  3. Brokerage Firm Benefits: A trusted brokerage firm like Astha Trade can provide valuable assistance in understanding the equity share market and making informed investment decisions.

FAQs

  1. How to Sell Equity Shares?

Equity shares can be sold through your brokerage account. You need to place a sell order specifying the number of shares to sell and the price at which to sell.

  1. Are Equity Shares Redeemable?

Typically, equity shares are not redeemable. They remain in existence for the life of the company, unless the company decides to buy them back.

  1. Are equity and shares the same thing?

Yes, in the context of the stock market, ‘equity’ and ‘shares’ are often used interchangeably. Both terms refer to a proportionate ownership in a company.

  1. How to Invest in Equity Shares?

Investing in equity shares involves opening a demat and trading account, researching potential investments, and buying shares through the trading platform provided by your brokerage firm.

  1. When to Sell Equity Shares?

The decision to sell equity in share market can be based on various factors, including achieving your investment goal, changes in the company’s fundamentals, or shifts in market conditions.

  1. Who Can Buy Equity Shares?

Any individual or entity, whether resident or non resident, can buy equity shares, provided they meet the necessary regulatory requirements and have a trading account.

  1. Where to Buy Equity Shares?

Equity shares can be bought on stock exchanges through a brokerage account. In India, the two primary stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

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