What are Equity Shares?
Equity shares are long-term financing sources for any company. These shares are issued to the general public and are non-redeemable in nature. Investors in such shares hold the right to vote, share profits and claim assets of a company. The value in case of equity shares can be expressed in various terms like par value, face value, book value and so on.
Types of Equity Shares Available?
Ordinary Shares –
Such shares are issued by a company to procure funds to meet long-term expenses borne by a business. They have associated ownership benefits provided to an investor, wherein the individual gains exposure to various management segments involved in running operations. An individual possessing a large number of these types of equity shares have substantial voting rights.
Preference Equity Shares –
Preference equity shares are generally issued to an investor as a guarantee of the payment of cumulative dividend before returns are distributed among ordinary shareholders. However, preference shares do not have any associated voting and membership rights which are provided on common shares.
Classification among preference shares can also be made, depending upon its participating or non-participating capacity. If an investor purchases participating preference shares, he/she is entitled to the stipulated amount of profits, as well as bonus returns, depending upon the performance of a company during a particular financial year. Owners of non-participating equity shares are eligible for no such benefits.
Bonus Shares –
These types of equity shares are issued out of retained earnings of a business, wherein the profits are distributed among investors in the form of an additional stake in a company. Contrary to other types of equity instruments, bonus shares do not increase total market capitalisation value of a company. It just represents capitalisation of excess funds generated from production.
Rights Shares –
These shares are issued by a company to premium investors at a discounted price as an invitation to increase its stake in the respective business. A firm only sells shares to rights for a stipulated time to raise the required finances to meet its expenditures incurred.
Features of Equity Shares
Equity shares have the following characteristics, which make it one of the most popular investment tools in a stock market –
- Most types of equity shares include voting rights to an investor, allowing him/her to choose individuals responsible to run the business. Electing efficient managers allows a company to increase its annual turnover, thereby increasing investors’ average dividend income.
- Equity shareholders are eligible to realise additional profits generated by a company in a fiscal year. This increases the total wealth of individual investors having a considerable investment in equity shares of a company.
- Even though equity shares are not repaid until a business closes down, equity shares already issued can be traded in the secondary capital market. Thus, investors can withdraw funds from a company upon their discretion. This ensures massive wealth creation through capital appreciation of such shares.
Why Should You Invest in Equity Shares?
Investing in best equity shares have the following benefits, such as –
- High Income
Equity share market is an ideal segment of the capital market responsible for the remarkable income of investors. Wealth creation not only works through capital appreciation of such securities but also high dividend earnings received by individuals.
- Hedge Against Inflation
Investment in profitable equity shares increases the standard of living of individuals through asset value appreciation. Money invested in equity shares offer manifold returns, higher than the rate of erosion of an individual’s purchasing power due to inflation. Thus, the real value of investments tends to rise over time.
- Portfolio Diversification
Investors having a low aptitude for risk tend to stick with debt instruments, as it is less volatile. However, stock and bond market fluctuations are inversely related when it comes to aggregate demand. Thus, when the bond market is underperforming, risk-averse investors can profit from investment in best equity shares through stock market investments.
What are the Risks Associated with this Investment?
Equity share market tends to be the most volatile segment in a stock market, profoundly affected by minor fluctuations. Returns on equity investments are paid out after all other obligations of a company have been met. During market downturn, production cycle of a business is affected, thereby reducing profits generated by a business. This lower share of profit is used up to meet all existing liabilities before funds are disbursed to as equity investment returns. Thus equity markets tend to be adversely affected during market downturn.
Market fluctuations are a part of the business cycle, which has associated highs and lows as per the prevailing socio-economic scenario of a country. Even if equity shares demonstrate lower returns at a certain point of time, it is bound to pick up when the economy recovers.
Also, equity investments tend to rise in value over time. Thus, if funds are kept locked-in for an extended period, the value of the same is bound to increase manifold in the future, thus ensuring substantial wealth accumulation of investors through capital gains.
Alternative Investment Options
Debt Securities –
Equity shares yield the highest returns on total investment in the stock market. However, it has the highest amount of risks associated as well, which do not bore well with risk-averse investors. Alternative investment options in the form of debt instruments can be undertaken by them, which have lower risk burden. However, the returns generated by these securities tend to be smaller as well, reducing the chances of substantial capital gains.