Given the total market value of listed companies surpassing ₹400 lakh crore in 2024, India’s investing environment is seeing significant growth. Among the several tools available for investment, debt and equity securities are the most common ones. Bonds and other debt securities indicate that the investor has made an investment in a business or government organisation, while equity securities indicate ownership in a company.
Often referred to as equities, equity securities provide investors with some of a company’s assets and profits. They enable individuals and companies to own a portion of the companies they assist, enabling their involvement in company growth and achievement.
This article will explore various types of equity securities, including common stock, preferred stock, convertible securities, warrants and equity derivatives.
Understanding equity securities
An equity security is fundamentally a financial asset that denotes firm ownership. Equity securities offer the shareholder a balancing claim on a portion of the business’s assets and income. The valuation of these securities is contingent upon the company’s performance, the market’s state, and the economic climate.
Owning stock securities makes you part-owner of the business. Usually accompanied with voting rights, this ownership lets you participate in important corporate decisions including board of directors election or approval of significant acquisitions and mergers. Usually, the degree of these voting rights corresponds to your share count.
Dividends allow shareholders another entitlement to a part of the company’s earnings. While not every company pays dividends, those that give their owners a consistent income.
Capital gains also benefit proprietors when the price of the equity security increases over time, as they generate profits when they sell their shares for a higher price. For instance, the stock market had a record-breaking rally that increased investor wealth by ₹110.57 lakh crore. Rising 16.64%, the BSE Sensex hit an all-time high of 85,978.25 on September 27, 2024.
Equity securities types
#1 Common stock
Common stock, which captures the core of corporate ownership, is the basic type of equity investment.
Capital appreciation is often the primary objective of common stock investors, who derive benefits from fluctuations in the share price over time. However, dividends are not guaranteed, and common stockholders are the last to receive payment in the event of a liquidation.
#2 Preferred stock
Preferred stock is a distinctive form of equity investment that offers stockholders a more consistent income, as it is characterised by fixed dividends, in contrast to common stock. Preferred stockholders are granted priority in obtaining dividends and assets during liquidation, as opposed to common shareholders.
Preferred shares can be non-cumulative, in which case unpaid dividends are lost, or cumulative, guaranteeing that missed payouts are paid before common dividends.
Also read: Preference Shares and Their Benefits
#3 Convertible securities
Convertible instruments are typically issued as preferred equities or bonds, and they can be converted into a predetermined number of common shares. This feature allows investors to capitalise on potential capital appreciation. Initially, they receive fixed income through dividends or interest.
A corporation might issue convertible bonds, for instance, which provide investors with the best of both worlds regular income and the possibility for growth by converting them into shares at a designated price.
Convertible securities are appealing in unpredictable markets because they enable investors to effectively manage risk while simultaneously benefiting from increasing stock prices.
#4 Warrants
Warrants are securities that give the owner the right to buy a company’s stock at a certain price within a certain amount of time. To provide purchasers with an additional incentive to acquire them, they are frequently issued in conjunction with other securities, such as bonds.
Unlike options, which are temporary tools, warrants often have longer expiration times. In an upward market, investors might find value in warrants as, should the stock price rise above the exercise price, their worth will be much enhanced.
For example, Suyog Telematics approved the 1,40,360 warrant conversion into equity shares at an issue price of ₹570 apiece on August 27, 2024, therefore, generating ₹6,00,03,900.
#5 Equity derivatives
Equity derivatives are financial agreements derived from underlying equity securities. They comprise futures contracts and options that let investors gamble on stock price swings or hedge their risks.
Equity derivatives are actively traded on Indian platforms such as the National Stock Exchange (NSE), thus giving investors chances to properly manage their portfolios.
For example, a trader might use put options to guard against possible falls while buying call options on a company, therefore wagering on price rises. These instruments facilitate strategic investments in erratic markets and enhance liquidity.
Also read: Understanding derivatives in the stock market
Other types of equity securities
Employee stock options (ESOs), which businesses award to staff members as part of their pay packages and thereby, provide them the chance to purchase shares at a set price, are another form of equity securities.
Equities crowdfunding is an additional method by which organisations generate revenue by distributing shares to a large number of investors via online platforms.
Furthermore, offering varied portfolios of equity assets, mutual funds and exchange-traded funds (ETFs) exposes investors to different companies without requiring them to purchase individual stocks.
These alternatives cater to different investment strategies, risk tolerances, and financial goals.
You may also like: ESOPs: Empowering employees with ownership
Key benefits of investments in equity securities
There are several benefits of equity investment that an individual can enjoy by investing in equity shares. Some of them are enumerated below.
- High returns: Investing in equity shares offers investors great returns from capital appreciation as well as from dividend income.
- Provides a cushion against inflation: Investing in equity shares lets a person maybe get great profits. Because of inflation, the rate of returns obtained is sometimes more than the rate of wearing out of the investor’s purchasing power. Investing in equities shares then serves as a counterpoint against inflation.
- Ease of investment: Purchasing stocks is straightforward. Investing via several stock markets (NSE, BSE equities) in a nation can be done by investors using the services of a stockbroker or financial planner. Should one have a Demat account, one can purchase the stocks in a few minutes.
- Diversification of investment portfolio: Since debt instruments are low-risk investment choices with less volatility, investors typically decide to stick to them. Debt instruments might not always provide great returns, hence people might vary their investment portfolio by including stocks for better returns.
Risks of stock market investing
- Market risk or systematic risk: It implies that an investor could suffer losses depending on elements influencing the general state of the national economy and financial market performance.
- Inflation risk: Another phrase for inflation risk is purchasing power risk. It is the possibility that a declining buying power brought on by inflation will cause the cash flows from an investment to lose value over time.
- Liquidity risk: When an investment cannot be sold quickly, liquidity risk arises.
- Business risk: It refers to the possibility that any negative operational, financial, or market condition can influence or cause a company to stop running.
- Volatility risk: Volatility risk results from the stock values of the companies possibly changing with time.
- Currency risk: It speaks about the possible loss an investor in foreign currencies or made foreign-currency-traded investments could suffer from changing foreign exchange rates.
Bottomline
Investing in equities offers a large range of opportunities for both institutional and consumer investors. Each kind of equity investment, from common and preferred stocks to convertible instruments and warrants, has particular benefits and risks.
Good portfolio diversification and risk management depend on an awareness of these possibilities. Equity investments can provide large returns and function as a hedge against inflation in the dynamic Indian market, where the total market capitalisation has reached hitherto unheard-of heights.
Through careful choice of the appropriate mix of equity securities, investors can meet their financial objectives and help the businesses they support to flourish.
FAQs
How are equity securities traded?
Indian stock markets including the BSE and NSE trade equity securities. Investors purchase and sell shares using brokers, who manage trades on behalf of investors. Supply and demand define prices; firm performance, economic situation, and market attitude all affect them as well. Electronic trade guarantees market transparency and liquidity by means of which trades can be completed. This system helps to allocate cash effectively and presents chances for investments.
Do equity securities have credit risk?
Generally speaking, equity securities do not have credit risk—that is, the risk of a borrower failing on financial commitments. Rather, they represent market risk, in which case firm performance and market environment can affect the value of the securities. On the other hand, equity investors indirectly expose themselves to the credit risk of the company since they are last in the queue to be paid in case of a financial crisis.
What is the risk of equity securities?
Equity securities carry market risk, in which case share prices change depending on the state of the market; business risk, related to the operational success of a firm; and liquidity risk, which might stop rapid asset sales. Investors also run volatility risk—where stock prices can show notable swings—as well as inflation risk, therefore undermining returns. Common stockholders also have less priority in claims after liquidation, therefore raising their total investment risk.
Are bonds equity securities?
Bonds are not equities securities. Bonds are financial tools wherein investors lend money to a company (corporate or governmental) in return for consistent interest payments and a principal return at maturity. Equity securities give their owners voting rights and dividends as well as clear ownership. Generally seen as less dangerous than equities products, bonds offer stable income.
Are equity securities fixed-income?
Equity securities are not fixed-income. Although their rewards vary based on the company’s performance, equity securities represent ownership in a company and offer possible dividends and capital gains. Fixed-income assets, including bonds, have regular interest payments and reimburse the principal at maturity. They also offer more constant returns. Equity securities are typically more risky even if they provide more development possibilities.
