• HDFC securities
• 20 Feb 2023
• Knowledge Centre

 

Investing is a popular way to generate and manage wealth over the long-term. Equity investments are one of the most preferred investment options for this purpose. This article will discuss what are equity shares and the types of equity shares.

What are equity shares?

Equity shares, also known as common stock or ordinary shares, represent ownership in a corporation. When an individual purchases equity shares, he becomes a shareholder in the company and has a stake in its success.

In return for their investment, shareholders are authorized to receive a portion of the company's profits, known as dividends. If the company performs well, is profitable and expanding, the value of equity share can increase, which leads to the appreciation in the value of investors’ money. On the other hand, if the company performs poorly, the value of the equity shares may decrease.

Equity shares are issued by companies to raise capital for growth or expansion. Equity shareholders receive voting rights, allowing them to have a say in important decisions. It is important to note that equity shares are considered riskier than other investments such as bonds or savings accounts because they do not guarantee a fixed return.

Types of Equity Shares

Ordinary Shares: These shares are regular equity shares which are issued by a company to raise funds for the long-term operations of the company.

Preference Shares: These shares come with a preferential right of payment of dividends before ordinary shareholders. Although they do not have voting rights.

Bonus Shares: Bonus shares are issued from a company’s retained earnings. These equity shares are issued to existing shareholders from the profits of the company.

Rights Shares: Rights shares are shares which are issued only to certain investors. These equity shares allow certain eligible investors at a discounted rate.

Equity shares are considered to be a risky investment as there are several internal and external factors which affect the value of the investment. Furthermore, at the time of winding up, the equity shareholders are repaid after all the other creditors. Moreover, the equity shares listed on the stock exchanges are exposed to market volatility. Their prices are determined by the demand and supply dynamics and various other factors and can fluctuate due to changes in the market.

However, equity shares are one of the most liquid asset classes as they can be bought or sold in the Stock market quickly.

Equity capital is the owner’s capital and is a perpetual source of funding. Hence, the equity shares issued by a company are non-redeemable and permanent in nature. These shares can be only returned in the case of liquidation of the company.

In conclusion, equity shares can be a great option for investors looking to generate long-term wealth. While there is no guarantee of a return on investment and equity shares are considered riskier than other investment options, they can offer the potential for higher returns and provide shareholders with a say in important business decisions. Therefore, it is important to understand the market and make informed decisions when investing in stocks.