In the finance/investment universe, the words, ‘share’, ‘equity’, etc, are words that you should get used t0. Although you hear these words frequently, understanding them may be a challenge before you can focus on improving them in terms of your investment goals. Hence, an explanation is needed.
Typically, equity brokers and other financial analysts will tell you that when a company is established, the initial source of its capital stems from the promoters/owners of the company. So, equity shareholders, when a company is created, are its owners. As a company gradually grows and develops, perhaps expanding its operations, there is a need for more funding. How does a company get more capital? The answer lies in more investors. The owners may rope in relatives, friends, venture capitalists, and so on. These individuals also become shareholders. Equity shares must be provided to them too. Since more funding is poured into a company, it may see significant further growth, becoming very large. At this stage, the company requires even more investment to widen its scope.
Small equity shareholders are no longer enough for a company to get into the big league. Hence, an Initial Public Offer (IPO) must be floated, inviting the general public to invest in the company. Consequently, a company gets more capital, on a larger scale than before, and makes the company’s shares available to the general public (as they now have a stake in the company). From an investors’ point of view, the shareholders' equity shares are in fact long-term investment sources of finance. By investing in the company, investors become entitled to have a share of the net profits of the company, besides a claim on the assets of the firm should it face liquidation.
To improve equity share and its types, types of equity market share value must be considered by investors. With the pressure and volatility that the share market experiences, investors of today are only focused on making a fast buck. However, for equity shares to be profitable for any investor, they should be looked at from a long-term standpoint. Instead of investors preferring near-term aims, holding shares for a short span, actual stock prices reflect any market’s long-term outlook. Research suggests that for any value creation of shares of a company to have a firm footing, it takes ten years or more. This is what the focus should be on to improve the equity share of a company and its types. Why? This will ensure that investors see more of a profit than if they cash out quickly.
When you invest in stocks and shares of a company, as an investor you wish to maximize profits. Unless you are a savvy trader, the only way to improve equity shareholding is by ‘holding’ on to it. On Motilal Oswal, you can get great tips for investment and prudently manage your wealth.
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