What is Equity Shares and its Types | Meaning, Types, Features & Benefits

What is Equity Shares?

The term “Equity shares” plays an important role in the stock market. These two words have different meanings “Equity” means Ownership and “Shares” means the units or quantities you hold in a company. It’s like an ordinary share that anyone can buy from the “stock Exchange” of any company, such as Tata Motors, Tata Steel, Reliance Industries, etc. to become a small part of the ownership of that company.

What is the main purpose of Equity Shares?

The main purpose of equity shares is to enable a company to raise capital. Companies issue “Equity Shares” to the public via IPO(Initial Public Offering) to raise money for business growth and expansion.

Types of Equity Shares

• Ordinary Shares: This is a common type of shares that the company can issue to raise funds from the public for various purposes like capital expenditures, research and development, expansion projects, and other operational needs. This type of share gives you the power to vote on company decisions during shareholder meetings. In this share, you will also get the dividend benefit when the company declares.
• Preference Shares: These types of shares are totally different from ordinary shares. In these shares, the company can raise capital in the form of preference shares without diluting the equity of the company. Those who own preference shares get the benefits of fixed dividends at a fixed rate but they don’t have a voting or ownership right. These shareholders have the first priority over the ordinary shareholders to give the dividend payment first and when the company closes down due to some reason then they have the first priority to receive their capital back.
• Right Shares: Rights shares are a type of shares issued by a company to existing shareholders when additional capital is needed. These shares allow current shareholders to purchase new shares at a discounted price, Those who do not want to participate in the right issue may face dilution in their ownership, this is because the new shares are distributed to the participating shareholders. Now they have more power in voting and ownership rights as compared to those who do not participate.
• Bonus Shares: A bonus share is also known as a Scrip dividend. The company issues bonus shares to the existing shareholders as a reward from its accumulated reserves and surplus. It basically reflects the company’s health and shareholder relations.
• Sweat Equity Share: Sweat equity share is for the company’s employees and for directors. The company issues equity shares to its employees and directors at a discount price or as a form of incentive for their contribution towards the company’s growth and development.

Features of Equity Shares:

1. Ownership: Equity shares provide shareholder ownership of the company. When the company needs additional funds, it can issue equity to the public, which may result in a dilution of existing shareholders’ stakes.
2. Dilution: When new equity shares are issued by the company it means that the ownership of existing shareholders will be reduced.
3. Permanent Capital: Equity shares are basically permanent to a company which means there is no obligation to repay the raised amount to the shareholder. when a company earns profit then its shareholders get that profit as a dividend, And if the company incurs a loss that means the shareholders also receive a loss. It is a relationship between the company and the shareholder for the long-term nature. When the company is on the verge of closure then whatever money is received by selling whatever is left with the company is distributed among the shareholders.
4. Voting Right: After becoming a shareholder of the company then the holder has the voting rights in the shareholder meeting to elect the right candidate for the company. If the wrong candidate is elected by the shareholders, This can reduce the potential consequences for the company. Therefore, selecting the right candidate is crucial for the company’s growth and success.
5. Capital Raising: The company can raise capital by issuing equity shares to the public. This means the company can raise capital without taking any debt from the bank. Now company is free to use that money for company growth and in new projects.
6. Dividend: when a company is in a good position and consistently earns profit each year then the company can decide to give the dividend as a reward to its shareholders which shows the financial health of the company.
7. Investment: Equity is a form of investment asset where the shareholders can earn money through capital appreciation when the prices of the company’s shares increase.
8. Liquidity: The term “Liquidity” means the securities/assets can easily be bought and sold in the market, for equity share there is a market known as a “stock exchange”, This is a place where shareholders can sell their shares to other investors who wish to buy them.

Advantages of Equity Shares:

Dividend Income: The company distributes its profit in the form of dividends to its stakeholders which is a good passive income for the investment.

Capital Appreciation: Equity capital has the potential to provide the capital return on the shareholder’s investment when the company performs well that means the stock price will also go up which is a good thing for the shareholder.

Voting Rights: Equity shareholders have the power to vote in the company’s meeting to decide who will gonna govern this company.

Liquidity: Equity shares are highly liquid, which means they can be easily bought and sold on the stock exchange.

Diversifications: Equity shares provide diversification which means investors can purchase multiple shares from multiple companies and hold them for the long term as part of their investment portfolio.

Inflation Protection: Equity shares typically offer long-term protection against inflation by providing capital gains.

Disadvantages of Equity Shares:

Risk of Loss: It is good for investment but it also has a risk because there are no guaranteed returns in equity. It totally depends on the company’s growth and other market parameters.

Market Volatility: As it is highly liquid its volatility can affect the investment. The market fluctuations can affect the equity share prices that may result in loss.

Limited Control: Equity shareholders have voting rights but the main influence of their voting power totally depends on the large stakeholder who has a significant stake in the company. The rest of the small stakeholder’s rights have less impact if we compare them to the big investors.

Sector-Specific Risk: The company has the risk of facing rapid changes in industry trends and other factors. Due to it, the price of the shares will fluctuate.