Equity shares: Essential features & benefits

Equity shares represent stakes in a company’s ownership that investors can acquire. If the company performs well, so does your share. It’s a win-win for both the company and you.

Suppose you had invested ₹10,000 in the Nifty 50 TRI (Total Return Index) in 2013; it would have grown at an annualised return of 13.2%. This means your investment will now be ₹26,282.

Whether you’re looking to make your first investment or simply trying to understand what it is about, this guide to equity shares is your starting point. Let’s dive in.

What is an equity share?

A company has two channels for obtaining capital. The first is through debt, where a company borrows loans from the public and issues a financial instrument called debenture. The amount is repaid in the future along with periodic interests.

Another option to raise capital is through issuing equity shares, where the company sells a portion of its ownership to the public for cash. So, investors become part owners and the company gets money to run the business.

Equity shares are issued through an Initial Public Offering (IPO) by public companies, after which the shares are listed on the stock exchange for the public to trade.

Once listed in the stock market, the stock prices fluctuate based on the demand and supply.

Investors buy shares in growing companies for potential profits but sell shares in struggling companies to avoid losses. This buying and selling cycle is what drives the stock market.

Types of equity shares

• Ordinary shares: Holders of ordinary shares get a piece of ownership in the company, often with voting rights that allow them to influence key company decisions. 
• Preference shares: Preference equity shares are mainly issued to guarantee the payment of a fixed or cumulative dividend before any dividend is paid to ordinary shareholders. But they usually don’t come with voting rights like ordinary shares. 
• Bonus shares: When a company accumulates substantial earnings, it issues bonus shares instead of paying dividends in cash. So investors get more shares without additional cost, hence called bonus shares.
• Rights shares: These are limited offer shares offered to existing shareholders at discounted prices to raise additional capital.

Core features of equity shares

• Voting rights: Equity shareholders are given the privilege to vote on pivotal company decisions. The weight of their vote typically corresponds to the number of shares they hold.

• Dividend payouts: While dividends aren’t guaranteed, equity shareholders are in line to receive them. The payout depends on the company’s performance and financial discretion.
• Participate in meetings: Holding equity shares gives individuals the right to attend annual and general meetings. It helps them to voice out their opinion and also be informed.

• Permanent nature: Equity shares represent a long-term commitment and are non-redeemable until the company decides to wind up its operations. Shareholders can either choose to sell their shares in the market or retain them for potential future value.

Why do investors love equity shares?

• Potential high returns: Equity shares offer the chance for significant capital appreciation. The stock prices increase as the company performs well.
• Regular income: While not guaranteed, companies that consistently declare dividends offer a predictable return.
• Liquidity: Equity shares are bought and sold on stock exchanges, making them easily accessible and liquid. 
• Hedge Against Inflation: With inflation reducing the value of money over time, equity shares, historically, have the potential to offer returns that surpass inflation rates, thus preserving and even enhancing the buying power of investments.
• Diversification: Investing in equity shares allows diversification by investing in different sectors, to create a balanced portfolio. 

Challenges and considerations in equity investing

• No assured returns: Unlike some other investment avenues, equity shares don’t guarantee returns. A company’s performance, overall market conditions, and even global events can impact returns.
• Risk of capital loss: Investors are always at risk of a capital loss. If you invest ₹10,000 in a share priced at ₹100 each and its price falls to ₹80, your investment value reduces to ₹8,000. While the hope is that share prices rise, due to unforeseen circumstances, they might drop.
• Market volatility: Another challenge is market volatility. As the prices of equity shares can fluctuate dramatically due to numerous factors, it creates unpredictability.

Final thoughts

Equity shares provide an avenue for both companies and investors to meet their financial goals. For businesses, they present an alternative to accruing debt, allowing them to raise capital while offering a piece of their ownership. For the investor, they present avenues for potentially high capital growth and dividends.

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