Equity shares: Definition, types, and benefits

When a company wants to raise capital, it has two choices. It can borrow money using various debt instruments like Debentures, which enable them to raise money from the general population. Alternatively, it can raise funds using Equity i.e., through the process of issuing shares.

Here, the company gives away part of their ownership to investors instead of their funds. Several shares can be issued by the company and Equity shares are one of them.

What are they?

Equity shares or common shares are a type of long-term financing source for firms. These are issued to the general population, are non-redeemable, and each represents a unit of part ownership in the firm.

Features

Some key characteristics of Equity shares that make them popular investment tools in the stock market include:

• Most Equity shares provide voting rights to investors and enable them to choose efficient managers to improve the annual turnover of the company.
• Equity shares are not repaid unless a company closes. However, shares that have already been issued can be traded in the secondary capital markets. This allows investors to withdraw funds from a business at their discretion. It also results in massive wealth creation because of the capital appreciation of such shares.
• Equity shareholders are also eligible to realize any other additional profits made by the company in a financial year.

Advantages

When you carefully invest in the best Equity shares, you can enjoy the following benefits:

• The money you invest in profitable Equity shares offers abundant returns that are higher than the erosion rate of your purchasing power due to inflation.
• The Equity share market offers remarkable returns to investors. Here, wealth creation is not only due to capital appreciation but also due to the high dividends earned by individuals.
• Investors with a low aptitude for risk usually shy away from investing in Equity shares and generally stick to debt instruments. However, the stock and bond markets are inversely related concerning aggregate demand. So, if such investors invest in profitable Equity shares, especially when the Bond market is underperforming, they can make good profits due to a diverse portfolio.

Types

The different types of Equity shares are as follows:

Preferential Equity shares

These do not offer any membership or voting rights. Instead, they are typically issued to investors as a guarantee of the payment of the cumulative dividend before the returns are distributed among the ordinary shareholders.

Ordinary shares

These are issued by firms to raise funds for their long-term expenses. They provide various associated ownership benefits to investors and expose them to several segments of the management involved in the operations.

Rights shares

These are issued to premium investors at discounted prices.

Bonus shares

The shares are issued out of a firm’s retained earnings, and the profits are distributed among investors as additional stakes in the firm.