Companies issue equity shares as a means of raising finance. These non-redeemable shares are made accessible to the general public. When investors purchase these shares, they can vote, share earnings, and claim a company’s assets. The investor gets dividends from the corporation as an equity stakeholder.
Types Of Equity Shares
- Preference Equity Shares – Preference equity shares are often provided to an investor as an assurance of the payment of cumulative dividends before regular shareholders get their returns. Preference equity stockholders have fewer voting rights than common stockholders. If the shareholders have sufficient participation ability, they may benefit from the agreed-upon profit amount as well as bonus returns. However, such advantages are not available if the shares are categorized as non-participating equity shares.
- Ordinary Shares – These shares are being offered to raise funds to cover long-term costs. Shareholders are allowed to engage in management and other aspects of the business. Investors who own a majority of these shares enjoy significant voting power.
- Rights Shares – A firm may issue these shares to specific investors at a reduced price to increase their interest in the company. An organization sells rights to shares for a certain period until sufficient funds are raised to cover the company’s expenses.
- Bonus Shares – When a corporation makes a profit, these sorts of shares are granted to investors in the form of extra holdings. Bonus shares, on the other hand, do not affect a company’s overall market valuation.
Characteristics Of Equity Shares
- Transferable And Dividend-Paying Securities – Equity shares are transferable, which means you may sell them to another investor or give them to someone else. Many businesses give dividends to their shareholders. The size of the dividend is determined by the company’s earnings and the availability of finances. As a result, if a corporation does not generate a profit, it may elect to defer dividend payments.
- Permanent In Nature – The company’s shares are non-redeemable and have no expiration date. You won’t be able to return these shares until the firm chooses to shut down.
- High Potential Rewards – Although equity shares are unpredictable and carry a high level of risk, the gains on offer are substantial. So, if you have a higher risk appetite, equities might help you build a large portfolio with excellent returns.
Advantages of Investing in Equity Securities
- Simple and Effective – With the guidance of a stockbroker or financial advisor, an individual may invest in the stock market. A Demat account allows investors to invest in stocks of any firm of their choosing. A Demat account makes trading transactions simple and efficient.
- High Reward, High Risk – As previously stated, equity shares come with a significant level of risk. However, the larger the risk, the better the return on equity share investment. When a firm produces a profit, investors benefit from the company’s dividends.
- Diversity – By investing in the company’s stocks from multiple sectors or businesses, investors may build a varied investment portfolio. Diversification gives you exposure to shares from a variety of industries, resulting in a well-balanced portfolio with predictable future returns.
What Are The Potential Risks Of Stock investment?
When it comes to stock investments, you can’t always anticipate a favourable return. Though, as you can see, equity shares have traditionally provided investors with higher returns due to many firms’ growing income and demand for items in recent years. Even if there’s a danger you’ll lose all of your money in the stock market. Even if it isn’t all of your money, you might lose a lot of money if the firm doesn’t generate any money or if the market is down. These are the dangers that come with investing in stock shares, and you must accept them before you begin your investment adventure.
- Volatility – Volatility is the term used to describe the movement in the share price over time due to a variety of factors. If the price of an equity share changes between 100 and 200 in a single day, the stock is considered to be more volatile than one whose price fluctuates between 140 and 160. Because the market price of a share is based on a variety of elements such as market sentiment, social, political, and other considerations, the equity share price may become very volatile in a short period. You may profit from a volatile stock by purchasing it at its lowest price and profiting even if the price rises somewhat. You may potentially make additional money by selling stocks when their value rises.
- Loss Of Capital – The demand and supply of equity shares are used to determine the price of the shares. When investors analyze a firm and determine that it has the potential to develop in the future, they begin buying additional shares. When a big number of shares are purchased, the price of the stock rises as well. In contrast to this situation, if investors expect the firm to do poorly, they may elect to sell all of its shares. This implies that demand for shares falls, perhaps resulting in a decline in share price. As a result, if you have invested in such shares, you may lose money owing to a decline in demand.