What are Equity Shares? Types, Features, and Advantages
Investing in the stock market has become an essential part of wealth creation for individuals and institutions alike. Among the different financial instruments available, equity shares are one of the most popular and widely traded options.
If you’re new to investing, you might wonder, what are equity shares? This blog will provide clear equity shares meaning, the various types of equity shares, their features, and the advantages of equity shares for investors.
What Are Equity Shares?
Equity shares represent the ownership of a company. When an individual or entity purchases equity shares of a company, they are essentially buying a piece of that business and become shareholders. Equity shares are also known as ordinary shares and entitle the holder to a claim on the company’s assets and profits.
Equity shares are listed on stock exchanges, and their value fluctuates based on the company’s performance, market sentiment, and other factors. Shareholders typically earn returns in the form of dividends and capital gains. However, with ownership comes risk, as the value of equity shares can rise or fall depending on the business’s success.
Equity Shares Meaning
In simple terms, equity shares refer to a financial instrument that represents ownership in a corporation. Equity shareholders are the legitimate owners of the company and have the right to vote on important corporate matters, such as electing directors and major corporate policies. Equity shares have no fixed maturity or dividend rate, and the returns are primarily dependent on the profitability of the company.
Equity shares are often considered long-term investments, as they tend to offer substantial returns over time compared to other forms of investments, such as bonds or fixed deposits.
Types of Equity Shares
Companies issue several types of equity shares to raise capital. Below are the main categories:
1. Authorized Shares
The maximum number of shares a company is legally allowed to issue is known as Authorized Shares. This number is defined in the company’s articles of incorporation. While a company may not issue all its authorized shares immediately, it reserves the right to do so in the future if it needs more capital.
2. Issued Shares
Issued shares are the actual shares that have been sold to investors. This is a subset of authorized shares. Once a company issues shares, it receives the capital from investors in exchange for granting ownership rights.
3. Subscribed Shares
Subscribed shares constitute a portion of the issued shares that investors have committed to but have not yet fully paid for. These shares reflect a binding agreement between the company and the investor.
4. Paid-up Shares
Paid-up shares define the portion of subscribed shares for which shareholders have fully paid the value. Upon full payment, the company can utilize the capital for its operational endeavors.
5. Bonus Shares
Bonus shares, also known as scrip dividends, are allocated to existing shareholders without additional cost. This allocation occurs when a company decides to capitalize its reserves. For example, if a company issues 2 bonus shares for every 10 shares owned, a shareholder holding 10 shares will receive an additional 2 shares at no extra expense.
6. Rights Shares
Rights shares are offered to existing shareholders at a discounted rate before the company issues them to the public. This helps existing shareholders maintain their ownership percentage.
7. Sweat Equity Shares
These shares are provided to employees or directors of the company as a form of recognition and appreciation for their dedication, creativity, and contribution of intellectual property. It is often used as a tool to retain valuable employees by giving them a sense of ownership in the company.
8. Voting and Non-voting Shares
Voting shares give shareholders the right to vote in important company matters, like electing board members. Non-voting shares, on the other hand, don’t offer voting rights but usually have other benefits, such as higher dividends.
Features of Equity Shares
Understanding the features of equity shares is essential for any investor looking to dive into the stock market. Here are the key features that define equity shares:
1. Ownership Rights
Equity shares provide investors with ownership rights in a company. The more shares you own, the bigger your stake in the company.
2. Limited Liability
One of the advantages of equity shares is that shareholders have limited liability. This means they are only responsible for the capital they have invested and not for the company’s debts.
3. Voting Rights
Equity shareholders typically have the right to vote on significant corporate decisions, such as mergers, acquisitions, or electing directors.
4. Dividends
Shareholders receive dividends as a portion of the company’s earnings. The dividend rate is variable and depends on the company’s profitability. Companies that perform well usually reward their shareholders with higher dividends.
5. High Liquidity
Equity shares are highly liquid, indicating they can be easily bought or sold. This liquidity makes them attractive to investors who want the flexibility to enter or exit the market quickly.
6. Capital Appreciation
One of the most appealing features of equity shares is their potential for capital appreciation. If the company grows and becomes more profitable, the value of its shares will typically increase, providing investors with substantial gains.
7. Residual Claim
Equity shareholders have a claim on the company’s assets which is known as residual claim. However, they are paid after creditors and preference shareholders, which makes them last in line for any payouts.
8. No Fixed Maturity
Equity shares don’t come with a fixed maturity date. Investors can hold on to them for as long as they want and sell them at any time based on market conditions.
Advantages of Equity Shares
Investing in equity shares comes with several benefits, making them a popular choice for long-term wealth creation. Below are the main advantages of equity shares:
1. Potential for High Returns
Equity shares have historically offered higher returns compared to other forms of investments, such as bonds or fixed deposits. While the stock market can be volatile, long-term investments in well-performing companies often yield substantial returns.
2. Dividend Income
Investors in equity shares benefit from regular dividend income. While dividends are not guaranteed and depend on the company’s profitability, they provide an additional source of income apart from capital appreciation.
3. Ownership and Voting Rights
Equity shareholders enjoy ownership in the company and have a say in its decision-making process through voting rights. This allows them to influence key corporate actions.
4. Hedge Against Inflation
Equity shares can play an important role as a hedge against inflation. As the value of a currency decreases due to inflation, companies typically raise their prices, which can result in higher revenues and profits. This, in turn, leads to an increase in share prices.
5. Portfolio Diversification
Equity shares allow investors to diversify their investment portfolios across various industries and sectors. This diversification reduces overall risk, as poor performance in one sector can be offset by gains in another.
6. Liquidity
One of the main advantages of equity shares is their liquidity. Investors can quickly buy or sell shares on the stock exchange, providing them with the flexibility to manage their portfolios efficiently.
Conclusion
Equity shares are a fundamental component of the stock market and offer investors a chance to participate in the ownership and growth of a company. By understanding the equity shares meaning, the different types of equity shares, their features, and the numerous advantages of equity shares, investors can make informed decisions and maximize their returns. While equity shares come with inherent risks, their potential for high returns and long-term wealth creation makes them an attractive investment option.