EQUITY SHARES!!
If you are even remotely related to the financial world, your ears would not have missed this term.
The equity shares enjoy substantial glory among the cohorts of financial experts. Any investment management discussion is incomplete without using equity shares in it.
It is the most common instrument used for investing in the stock market.
Since the ‘swim and sink with the company‘ shares are so popular, let us understand what they mean and whether they are worth investing in or not?
When an investor purchases an equity share, they contribute to the company’s total capital by becoming the shareholders of the company.
Equity shareholders are the company owners who receive ownership to the extent of shares held by them. These shareholders are vested with voting rights and get a say in the company’s decision-making.
Equity investments provide various benefits like capital appreciation and dividend payouts. The ultimate objective of a company behind issuing equity shares is to generate capital for business development. At first, the company gives equity shares through an Initial public offering (IPO). Later, when the company is listed, the general public can easily trade shares on the stock exchange.
The National stock exchange (NSE) and the Bombay stock exchange (BSE) are India’s two popular stock exchanges.
However, the equity share definition provided below will provide the main gist of the matter.
Equity shares are the certificates of ownership issued by a company to generate funds for expansion and growth in exchange for ownership.
There are various types of equity shares depending on ownership, dividend payments, preference, employment in the company, etc.
So, we have listed below all the types of equity shares, and they are as follows:
Ordinary shares are the shares that a company issues to raise funds for meeting its long-term expenses. An investor gets ownership of the firm in exchange for these shares. The portion of ownership received by an investor is equivalent to the number of shares they hold. The ownership allows shareholders to have a say in the company’s decision-making, thereby providing them with voting rights.
Preference equity shareholders lack voting rights or membership rights that ordinary shareholders avail. But, these shareholders are prioritised during dividend payments above ordinary shareholders, and they also receive the assurance of cumulative dividend payments.
Preference equity shares are further classified into two types:
Participating preference equity shareholders receive a specific amount of profits and bonus returns in a specific financial year. However, these benefits largely depend on the company’s success.
Non-participating preference equity shareholders do not receive any such benefits.
If the company goes insolvent, preference equity shareholders will receive the repayment of capital before the ordinary shareholders during the winding-up phase.
When a company has access to retained earnings, it decides to distribute its profit in the form of a bonus issue. Hence, Bonus shares are the type of equity shares that the company issues to its existing shareholders from its earnings.
Since the issue is made to the existing shareholder, there is no increase in the company’s market capitalisation. However, market capitalisation does increase when other types of equity shares are issued.
Right shares are exclusive shares reserved for only specific or premium investors, and these shares facilitate an increase in the equity stake of a particular shareholder.
The main objective behind issuing right shares is to raise money from premium investors for a specific financial requirement. Hence, the issue of such shares happens at a discounted price.
Sweat equity shares are those shares that are received only by the directors and employees of a company.
The shares are issued to the employees or directors as a token of appreciation for their excellent work.
It is issued to applaud the contribution of such employees and directors to the intellectual property rights, know-how, or value addition to the company; sweat equity shares are issued at a discount to such directors and employees.
Employee stock options (ESOPs) are a grant provided by the company to its employees and director for retention and incentive purposes.
This grant states that an employee can purchase certain shares at a predetermined price on a future date under the terms specified in the Employee stock option plan (ESOP).
After this grant is offered, it is exercised only for those employees or directors who have accepted it.
When a company decides to conduct a buyback of its shares, the shares repurchased are called Treasury Stock.
Hence, treasury stocks are those equity shares repurchased from the stock market by the company.
For someone who is a beginner at investing, the different types of prices of equity shares can create confusion leading to investment disasters. Hence, it is essential to know about the different prices used to value a stock.
The different types of prices of equity shares are as follows:
The value of a share that a company records in its books of accounts are termed face value.
Face value forms the legal capital of a company in its books of accounts.
The issue price is when a company offers its shares to the investors, and the face value and issue price are similar in cases of new companies.
When a company decides to issue shares at a higher price than its face value, it is said to be given at a premium.
When a company decides to issue shares at a lower price than their face value, it is said to be given at a discount.
The book value of a share signifies the value that shareholders will receive if the company is liquidated.
This value is most commonly used during mergers and acquisitions, and it is also valuable for estimating the company’s current valuation.
The formula for calculating the book value of a share is as follows:
Book value per share = Equity available to ordinary shareholders / Number of outstanding shares
Or,
Book value per share = Paid-up Capital + Reserves and Surplus – Any Loss / Number of outstanding equity shares of the company.
The market value of a share is the price at which shares are sold in the stock market, and this value applies only to companies listed on the stock exchanges.
Stock market value is affected by various external factors, and hence they can be different from the Book value or other fundamental values.
Fundamental value is the price of a share calculated by various methods to ascertain figures that will facilitate the merger and acquisition of a company or find out the current valuation of that particular company.
The various methods used to calculate fundamental value are as follows:
Some features of the equity shares are as follows:
Most equity shares carry voting rights for their shareholders, allowing them to take an active part in the company’s management. It’s one of the key features that help in differentiating equity shares from preference shares.
Investors who possess a high appetite for risk can derive extreme corpus returns from equity shares. Also, the price movement of these investment options is backed by numerous internal and external factors. Even though these shares are volatile and possess high-risk characteristics, they yield greater returns.
Equity shares are non-redeemable and are issued to the public in general. These risky investment options are paid off at the time of winding up of the company after paying off debentures and preference shareholders.
Equity shareholders have the leverage to earn potential profits in a fiscal year, increasing their total wealth.
Equity shares are traded both in primary and secondary markets and are therefore highly liquid investments. This, in turn, makes them highly liquid because one can sell them during trading hours and withdraw funds at their discretion, ensuring maximum wealth creation.
A company is under no obligation to pay dividends to its equity shareholders in the case when a particular company does not make enough profits or has incurred losses in any specific year.
Equity shares are a popular name in the financial world. It is the go-to investment strategy for ambitious investors willing to take the risk to obtain high returns.
Some of the reasons stating as to why an investor should invest in equity shares are as follows:
Equity shares allow you to generate capital gains through appreciation in the market value of the company’s stock. Apart from building a colossal corpus with substantial returns through capital gains, the equity shares also assure steady income through dividend payouts.
The capital gains, high returns, and steady dividend payouts from the equity investment add to your wealth generation.
Inflation is the hidden devil that depreciates the time value of your money. Every year the value of your money deteriorates by a certain percentage due to inflation. So, when you invest money in the stock market, you can earn returns at a higher percentage than inflation.
This strategy increases an investor’s purchasing power and helps them beat inflation while benefiting them with inflation-proof earnings.
Risk-averse investors prefer debt instruments over equity investments, given the risk involved. However, these high-security investments can underperform, leading to inflation troubles.
Hence, one can smartly invest a safe amount in equity investments to maximise returns.
If you have not already heard enough success stories about the benefits of equity investments, let us address the merits of investing in Equity shares.
The merits of investing in equity shares are as follows:
Equity investments are high-risk investments, but they also offer great returns. When a company is profitable, the equity investors benefit through steady dividend payouts. An investor also enjoys capital gain when the market value of a company’s stock increases.
Investors are usually investors in the equity market with the help of a stockbroker or financial planner, which makes it easy. However, an investor can also invest in equity investments of any company of choice using a Demat account.
A Demat account is suitable for facilitating efficient and user-friendly trading transactions.
Equity investment provides various options across different types of industries and sectors.
This variety of options helps investors create a diverse investment portfolio by exposing it to two sectors, thereby creating a balanced lump of stocks that are bound to give stable returns in the future.
Investors cannot always expect positive returns from their equity investments. History has witnessed many investors booking extraordinary profits by investing in undervalued equity shares.
However, there are numerous cases where people have lost all their money by investing in stocks of companies that have failed later. To prevent the money from becoming a failed investment, an investor should know the following risks before investing in the equity market.
Hence, the demerit of investing in equity shares are as follows:
The market value of equity shares of a company is evaluated by the demand and supply of that particular share.
If the investors are proactive enough to ascertain a company’s expected future growth accurately, they increase their intensity while purchasing the shares of that particular company. The more the purchase, the better the market value.
However, if a company ascertains that a company will not perform well in the future, it may decide to sell its shares. When the selling of shares is more than its purchase, the market price of that share decreases.
So, if you have invested in a share that experienced more selling than purchases, you might incur a capital loss due to the decrease in the market value of the share.
The equity market fluctuates broadly, and hence it is considered volatile in nature.
The market value of a share can fluctuate beyond expectations.
A share price can go from 100 to 200 in a day, and it can go from 200 to 100. Hence, it is crucial to ascertain the volatility of a share before investing in that particular share.
The fluctuations in the market depend on various factors like market sentiment, social, political, and other macroeconomic external factors.
So, staying alert and careful is imperative to avoid severe loss.
To invest in equity shares, an investor needs to have the following prerequisites in place.
The following accounts that an investor must have before they decide to invest in the stock market are as follows:
The Demat account facilitates the holding of shares and securities in electronic form.
The trading account is necessary for buying and selling shares. An investor must have a trading account registered with a stock brokerage firm if they want to place orders for the trading of shares.
A linked bank account is mandatory if an investor wants to invest in the equity market through Initial Public Offering (IPO) or from the secondary stock market.
Now, after an investor has ensured the formation of the accounts mentioned above, there are two ways investors can invest in the stock market. The two ways to invest in the equity market are as follows:
The first method of investing in the stock market is by placing a bid for an Initial Public Offering (IPO).
A company launches its IPO before it is listed on any stock exchange. The IPO is a method used by the company to provide its equity to public investors.
The investors can bid for an IPO through the stock exchange or buy certain shares through a net banking account.
If an investor was not allotted shares through IPO, they could always purchase them from the stock market after listing the company. So, to purchase the stocks from the stock market, an investor should follow some steps. The steps are as follows:
These are the methods one can use to invest in the equity market.
Risk-averse investors avoid equity investments because of the risk involved. Though equity shares yield the highest returns in the stock market, the risk involved can be disturbing.
Hence, an alternative investment for such investors would be investing in instruments with a lower risk. One should remember that debt instruments with lower risk tend to generate lower returns, and this is why an investor cannot expect substantial capital gains from debt instruments.
But, for someone with a low-risk appetite, debt instruments are a go-to choice.
Equity shares are efficient and easy instruments for facilitating better returns. However, investing in the equity market is time-consuming and requires tremendous effort.
So, before one decides to invest in the equity market, one should better understand the fundamentals and workings behind the equity market and its operations.
After gaining the required knowledge and experience, an investor can build a considerable corpus through equity investments.
The equity in stock signifies a financial source of the company, and this financial source provided by the investors happens to be for the long-term.
The investors receive certificates of ownership called shares in exchange for the financial capital.
The certificates of ownership give an investor exclusive access to voting rights in the company, a share in the company's earnings, and a claim on the remaining assets during the company's liquidation process.
When a company raises funds by offering equity shares, the capital accumulated through issuing those equity shares is known as equity capital.
It is the money given to the company by the investors for the expansion and growth of the company. The investors receive certificates of ownership and exclusive rights in exchange for their money.
There are various types of equity share capital. Some of the types of equity share capital are as follows:
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