Especially since the advent of the pandemic, the phrase “invest in equity” has been passed around very frequently. However, while many vaguely understand the broader picture of the stock market and equity, the actual meaning of equity shares is not widely understood.
What is an equity share?
Equity shares are those shares that are issued to the public by the company for long-term financing. These shares are not redeemable, which is the main reason why they are considered to be a long-term financing option. While beginning with equity shares, it’s important to familiarize yourself with a few terms like book value, market price, face value, issue price, and many more.
Features of equity share
There are several features to equity shares: Some of them are mentioned below:
1. Accumulate wealth
After purchasing an equity share, given the company performs well, you can achieve capital gains and dividends on the equity shares.
2. Voting rights
Once you are a shareholder of a company, you are eligible to vote on the management of the company that is in proportion to the number of equity shares you hold in the company.
3. No fixed dividend rate
The amount of dividend keeps varying each year based on the business outcomes of the company. This dividend rate is suggested and decided by the board of directors and is declared by the shareholders.
4. Transferable in nature
The equity shares can be transferred from the primary shareholder to another person with or without consideration.
Advantages and disadvantages of equity shares
Advantages: To begin with the advantages of equity shares, there are many of them for the shareholder.
- When the company performs well, the dividend rate increases, thereby providing higher profits proving to be one of the key benefits to equity shares.
- The shareholders have a right to vote when it comes to deciding the company’s management.
- You can create wealth not just through appreciation of capital but also through high income from dividends.
- Equity shares can be easily sold by the shareholder without any hassle.
- As the company’s worth in the market increases, the price of the invested capital also increases thereby giving greater returns.
- Finally, investing in equity shares helps you diversify your portfolio and mitigate financial risks.
Disadvantages: Given that there are many advantages, they come along with certain disadvantages too.
- In case the company is held liable, the equity shares are not mandatory to be paid back to you.
- If the profitability of the business reduces, you may experience losses from the capital you have invested.
- Any fluctuations in the market can lead to fluctuating prices in your investments leading to unstable profits and losses.
Now that you have a better understanding of equity shares, you can get started with purchasing a few shares on the online share market. There are several brokers that offer stock market trading through which you can purchase equity shares. However, it is necessary to be aware of not only the benefits but also the downside of the equity share market.