Equity shares, also termed common or ordinary shares, signify ownership in a company, turning the holder into a shareholder with a stake in the company’s fortunes. Shareholders enjoy voting rights on crucial matters and, in return, the company secures capital for operations, expansion, or debt repayment when issuing equity shares. In exchange, shareholders anticipate returns through dividends and capital appreciation. Despite being last in line during bankruptcy, equity shareholders possess significant profit potential. Various classes of shares with distinct rights exist, including voting, dividend entitlements, and preemptive rights. This exploration provides insights into equity shares, offering a concise understanding of their advantages and disadvantages. Recognising their definition is vital for informed investment decisions, and within the realm of stock investing, familiarity with strategies like long-short equity investing is crucial.
Table of Contents
Defining Equity Shares
An equity share, sometimes referred to as a normal share, is a form of fractional ownership that carries with it the greatest amount of entrepreneurial risk for a trading firm. These shareholders have the ability to cast ballots in any organisation.
- Equity shares are a long term financing option for any firm.
- The general public receives these shares, which are not redeemable.
- Such shares give shareholders the ability to vote, partake in profits, and claim a company’s assets.
- A number of terms, such as par value, face value, book value, and others, can be used to describe the worth of equity shares.
Justifications to Opt for Investing in Equity Shares
There are several reasons why someone might choose to invest in Indian equity shares:
- Economic Growth: India has one of the world’s largest economies that is expanding the quickest. A growing economy can lead to increased demand for goods and services, which can, in turn, drive revenue and profitability for companies operating in India. This can result in higher stock prices and dividends for shareholders.
- Demographic Opportunity: India has a large and growing population, with a large proportion of people in the working age group. This can provide a large domestic market for goods and services, as well as a large pool of potential employees.
- Reforms: The Indian Government has been undertaking structural reforms in recent years to improve the ease of doing business and to attract foreign investment, which may help boost economic growth and create new opportunities for businesses.
- Diversification: India is a large and diverse country, and its stock market offers a wide range of investment opportunities across different sectors and industries. Investing in Indian equity shares can help diversify an investment portfolio and reduce risk.
- Valuations: India has a large number of undervalued companies in comparison to other developed countries, which can provide better returns to investors in the long run.
However, investing in any stock market, including India, carries a certain level of risk. It’s important to research and carefully consider any investment before committing funds. It’s also worth noting that the Indian equity market is known for its volatility, and there can be large fluctuations in stock prices in a short period of time. So as an investor, one should have a long term investment horizon and a well-diversified portfolio to reduce the overall risk.
Advantages of Investing in Equity Shares
- Legal responsibilities of equity shareholders have minimal legal obligations even though they own a portion of the business. A set dividend rate does not instil a sense of responsibility or accountability.
- Such shares are a perpetual source of finance, and an enterprise must repay it, with the exception of when it is in liquidation. It can be distributed even without placing additional charges on its assets.
- Equity stockholders enjoy voting rights and are the company’s true owners.
- Considering the substantial risk involved, equity shares have the ability to generate high profits. The profit increases as the risk does. The prices of the shares change because of a variety of variables, making them very volatile.
- The share price is influenced by a variety of factors, including supply and demand, the economy, company performance, geopolitics, etc.
- Equity shareholders have the ability to vote. Voting on company policies and business choices is permitted.
Drawbacks of Investing in Equity Shares
- While only equity stock is issued, the company is not permitted to benefit or claim credit when trading on equity.
- Due to the inability to recover equity capital, there is a danger of overcapitalising liabilities.
- When the company makes more money, higher dividends must be paid, which increases the value of the securities in the market and opens them up to speculation. The management can overcome obstacles from equity shareholders by directing and systematising themselves.
- The performance of the firm has a significant impact on the outcome of the share. The equity investor won’t get any dividends if the business isn’t doing well and can’t turn a profit.
- As high-risk, high-reward investments, equity shares have a high likelihood of capital loss. The share price changes as a result of a variety of internal and external causes. A poor outcome could result in investors losing money.
- Share price volatility can occur for a variety of reasons. The share price fluctuates in response to market sentiment. It is impossible to implement the strategy of market timing. The share price changes in fractions of a second.
Conclusion
Equity shares symbolise ownership in a company, bestowing shareholders with voting rights and a stake in the company’s performance. This ownership is acquired through the purchase of shares, turning individuals into shareholders. When a company issues equity shares, it acquires capital, empowering shareholders to participate in key decisions. While offering potential returns through dividends and capital appreciation, equity shares also position shareholders with the last claim during bankruptcy. It’s crucial to grasp the nuances of various share classes, each entailing unique rights and characteristics. This understanding equips investors with the insights needed to navigate the complexities of equity shares and make informed investment choices.
