Investment FAQs – Equity

Equity is a part of a company, also known as stock or share. When you buy shares of a company, you basically own a part of that company. A company`s stockholders or shareholders all have equity in the company, or own a fractional portion of the whole company. They buy the shares because they expect to profit when the company profits. There are two basic types of shares that any company issues: equity shares and preference shares.

A. Equity Shares

Both public and private corporations issue equity shares. Equity shareholders are the owners of a company and initially provide the equity capital to start the business.
Equity share ownership in a public company offers many benefits to investors. The following are some of its main advantages:

· Capital appreciation
· Dividends
· Voting privileges
· Liquidity - shares can easily be bought or sold
· Dividend tax credit and capital gains tax

There are also a few drawbacks of owning equity shares. Although part owners of the business, common shareholders are in a weaker position. Senior creditors, bondholders and preferred shareholders have prior claims on the earnings and assets of a company. While interest payments are guaranteed to bond holders, dividends are payable to shareholders at the discretion of the directors of a company.

B. Preference Shares

A preference share is a type of share capital that generally enables shareholders to fixed dividends ahead of the company`s common shares and to a stated rupee value per share in the event of liquidation. Typically, the preferred shareholder occupies a position between that of a company`s creditors and its common shareholders.
As preferred shares have characteristics of both debt and equity, they provide a link between the bond and common equity sections of a portfolio. One shortcoming of preferred shares is that many are non-voting. However, after a specified number of preferred dividends are withheld, voting rights are usually assigned to preferred shareholders

Investing in shares offers many benefits over other asset classes like a high level of liquidity which gives you ready access to your money. There are over 6000 companies listed on the stock market in which you can buy shares, so there are plenty to choose from to match your investment needs.

Other benefits include:

A. Returns: Stocks can help you build long-term growth into your overall financial plan. Over a longer period of time, shares can produce significant capital gains through price appreciation. Some companies also issue free or bonus shares to their shareholders as another way of passing on company profits or increases in their net worth. Stocks, as an asset class, have outperformed most other type of investments over longer periods of time.

In addition, stocks pay dividend income, which has the potential to grow overtime. Shares that pay regular dividends are called income stocks. These companies have capital appreciation potential and when dividends are reinvested into additional shares, there is also the potential to compound investment returns.

B. Ownership: Stock represents an ownership or equity stake in a corporation. If you are a stockholder, you own a proportionate share in the company’s assets. That means you gain a part of the ownership of the company.

C. Tax Benefits: Investment in shares reaps great tax benefits. The dividend income generated on shares is completely tax-free. Long-term capital gains arising on equity investment is not taxed by the government. That means, if you invest in a company and keep the shares for 12 months, you don’t need to pay any tax on income you earn on selling the shares after 12 months. Short term capital gains tax on shares is also just 10%, while investment in other asset classes attracts short-term capital gains tax of 30%.

D. Control over your financial future: You can decide exactly how your money is invested, enabling you to have utmost control over your finances. You can choose to invest independently using your knowledge and expertise, share this responsibility with Motilal Oswal Securities Limited (MOSL) who can advise you on what shares to buy and sell or ask Motilal Oswal to manage portfolio for you. 

A. Bid: This represents the highest price a prospective buyer is willing to pay for a stock.

B. Offer (Ask): This represents the lowest price a prospective seller is willing to accept for a stock.

C. Market Order: An order to buy or sell a specified number of shares at the best available price at the time the order is received on the exchange floor. All orders not bearing a specific price are usually considered "at the market" which could mean paying the "offer" when buying or accepting the "bid" when selling.

D. Limit Order: An order for which you request a specific price at which the transaction may be executed.

E. Stop Buy and Stop Loss Orders: Orders to buy or sell that are placed above or below the current market price, which become active orders when the price of a board lot rises or falls to the specified price. These orders may be placed to execute at the market, at a specified limit or within a specified price range. A stop buy order can be used to protect against losses in a short sale, whereas a stop loss order can be used to protect a paper profit or to limit a possible loss when you already own the shares. Not all stock exchanges will accept these orders. Stop buy and stop loss orders are risky because they may not necessarily fill at the specified price but at the best possible price available at that time.