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What are Equity Shares?

Equity shares are the type of shares issued by a company. They represent ownership in a company and are also known as common stock or ordinary shares. Equity shares are an important source of finance for companies, enabling them to raise capital and expand their businesses. Equity shareholders have voting rights and can influence the decisions made by the company. Equity shares also entitle the holder to a share of profits when the company declares dividends. In short, equity shares meaning, or equity shares definition is that they are the part ownership of a company and bring with it the right to receive a share of the profits. Now that you know “what is equity share”, let’s discuss the topic further.

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Types of Equity Shares

The four main types of equity shares are:

1. Preference Shares

Preference shares are equity shares that provide shareholders with a fixed rate of return. These shares are also known as 'preferred stock'. Preference shareholders do not have voting or management rights but are paid dividends before the common shareholders.

2. Common shares

Common shares are the most widely held equity shares. Common shareholders have voting rights and are entitled to a share of the profits when the company declares dividends.

3. Bonus Shares

Bonus shares are additional shares given to existing shareholders without any additional cost. Instead, the company issues these shares out of its profits or reserves. As a result, bonus shares increase the number of equity shares outstanding, which can positively affect the share price.

4. Right Shares

Right shares are those offered to existing shareholders at a discounted price. The company issues these shares to raise additional capital. Right shares are issued in proportion to the number of existing shares held by the shareholder.

Features of Equity Shares

Here are some characteristics of equity shares:

1. Voting Rights

Equity shareholders are empowered with the right to determine how the business is steered, including selecting the right individuals to be in charge. This is an important factor leading to the success of any company, as effective management produces higher profits and better dividends for its shareholders. Thus, voting rights are essential for the shareholders to ensure that the company is well-run and has a bright future.

2. Additional Profitss

Bonus shares are a great way to increase the financial returns of equity shareholders. They are an additional source of profit as they are issued when the company makes higher profits. By increasing the number of equity shares held by an investor without any additional investment, bonus shares can increase the value of the investment when the market price of the shares goes up. This provides shareholders with an additional profit, making bonus shares a great way to benefit from the company's success.

2. Additional Profitss

Bonus shares are a great way to increase the financial returns of equity shareholders. They are an additional source of profit as they are issued when the company makes higher profits. By increasing the number of equity shares held by an investor without any additional investment, bonus shares can increase the value of the investment when the market price of the shares goes up. This provides shareholders with an additional profit, making bonus shares a great way to benefit from the company's success.

3. Liquidity

Liquidity is an important factor to consider while investing in equities. It refers to the ease with which an investor can sell his equity holdings and convert them into cash. Equity shares have no maturity period, so one can easily sell them in the secondary market. This gives investors great flexibility as they can liquidate their holdings whenever required. Furthermore, holding equity shares for an extended period also reaps the rewards of capital appreciation.

For instance, if you have held shares of a company for a long time, and the company has performed well over the years, you could have participated in bonus and rights issues. This could have enabled you to create greater wealth due to the rise in the share price over the years. Liquidity is one of the best features of equity.

4. Ownership Rights

Equity shareholders are the company's owners and are thus entitled to a share of the profits. They are also entitled to a share in the company's assets in case of liquidation. In addition, equity shareholders have the right to attend the annual general meetings and influence the decisions made by the company. These are some of the features of equity shares.

Why should you invest in Equity SShares?

Investing in equity shares offers several advantages for investors looking to grow their wealth and participate in the success of companies. Here are some key reasons to invest in equity shares:

  • Capital Appreciation: Equity shares offer the potential for significant capital gains as the value of shares may increase over time, especially in high-growth sectors.
  • Dividend Income: Many companies distribute a portion of their profits to shareholders in the form of dividends, providing a steady source of income.
  • Ownership and Voting Rights: Shareholders enjoy ownership in the company and the ability to vote on major corporate decisions, giving them a say in the company’s future.
  • Liquidity: Equity shares are easily tradable on stock exchanges, providing investors with the ability to quickly buy or sell their holdings based on market conditions.
  • Inflation Hedge: Equity shares have historically outperformed inflation, helping investors preserve the value of their money over the long term.

Diversification: Investing in a variety of equity shares allows for diversification across industries, reducing overall investment risk.

Advantages and Disadvantages of Investing in Equity Shares

Advantages

  1. Capital Gain: Equity investments carry the potential for capital appreciation over the long term. This means that if the market price of the shares goes up, the investor benefits from the increase in the value of his or her holdings. This is one of the major advantages of investing in equity shares.
  2. Limited Liability: Limited liability protects equity stockholders from personal responsibility for the company's obligations. This means that the company's equity stockholders are completely immune to any losses sustained by the business.
  3. Exercise Control: The real owners of a corporation are its equity shareholders, who have the final vote in how the corporation is run. They have a significant say in running the business and can vote on major issues. Shareholders have voting rights and can collect dividends from the corporation. In addition, shareholders have the right to vote on important issues, including the election of directors, the approval of critical financial decisions, and the amendment of the company's articles of association.
  4. Claim over Assets & Income: Equity shareholders are the company's owners and have a claim over the assets and income of the company. Therefore, in liquidation, equity shareholders will be the first to receive the proceeds after all liabilities have been paid off.
  5. Stock Split: Stock splits are a sort of corporate action in which the company's equity shares are diluted by issuing a new class of shares to the public. As a result, the share price may rise as the lower per-share market price will attract more buyers.

Disadvantages

  1. High Risk: Equity investments might carry a high degree of risk. The value of equity shares can vary significantly due to several factors, such as government policies, macroeconomic conditions, market sentiment, etc. As a result, investors must be prepared to bear losses in the event of a downturn in the market.
  2. Fluctuation in Market Price: The stock market is very volatile, and the price of equity shares can fluctuate significantly. This is mainly due to the influence of market forces that are beyond the investor's control. Thus, it is possible that in a matter of days, the value of shares can significantly increase or decrease. This makes investing in the stock market a risky yet potentially rewarding endeavour.
  3. Limited Control: The influence of the company's equity investors on management is limited. Investors have a voice in the company's governance and can vote on critical issues, although most shareholders ultimately have the last say.
  4. Residual Claim:Equity shareholders are the last to receive their share of the profits since debt holders are paid before them. This is because they are considered residual claimants in the company. Equity shareholders are the ones who will receive whatever is left after all the other expenses, debts, and liabilities have been paid off. This benefits the business since it means that equity shareholders are taking a risk with the company and will be rewarded if it succeeds.

What are the Risks Associated with this Investment?

Equity investments come with their own set of risks. Here’s a quick look at some of the most common risks.

  • Economy Risk: The economic performance of the country influences the performance of the equity market. The markets are likely to perform well if the economy is healthy. Economy risk is the risk of underperformance of equity investments due to less-than-ideal economic scenarios.
  • Financial Risk: Financial performance is another major factor influencing the equity market. Strong revenue-generating capacity, low debt obligations and consistent profits are key to the good performance of equity investments. Financial risk is the risk of equity investments underperforming due to bad financial performance.
  • Industry Risk: An industry cannot keep growing all the time. In fact, most industries go through cycles of growth and decline. Industry risk is the risk of underperformance of equity investments due to industry declines.
  • Exchange Rate Risk: Many companies generate major portions of their revenue from outside India. In such scenarios, the foreign exchange rates play a huge role in determining profitability. Exchange rate risk is the risk of a decline in the value of equity investments due to foreign currency fluctuations.

How to Buy Equity Shares?

Thanks to the advent of electronic trading, purchasing equity shares of companies has now become easier than ever. Here’s a short guide on how to get started.

  • Since shares are now mandatorily required to be held electronically, you need to first open a demat account with a Depository Participant. A demat account is used to digitally store the shares that you purchase online.
  • Once you’ve opened a demat account, the next step is to open a trading account with a stockbroker. A trading account lets you purchase and sell equity shares and other securities online.
  • With the trading and demat accounts up and running, the next step is to log into your stockbroker’s trading portal.
  • Upon logging in, all you need to do is enter the name of the stock in the search bar and enter a few details such as the number of shares and the price at which you wish to buy.
  • Once you’ve entered all the relevant details, proceed to place the order. The requisite funds will be debited from your trading account so make sure to first keep your account well funded.
  • The buy order will be placed and sent to the relevant stock exchange where it will be matched with a similar sell order.

Difference between Equity Shares and Preference Shares

Equity SharesPreference Shares
shareholders have voting rightsshareholders do not have voting rights
shareholders have a greater say in the running of the businesshareholders are usually entitled to a fixed rate of return
shareholders are entitled to a share of the profits when dividends are declaredhareholders are paid before dividends are declared
shareholders also claim over the company's assets in the event of liquidationhareholders have a lower claim

What are the Alternative Investment Options?

Alternative investments are options outside the scope of traditional investments, such as stocks, bond, and cash. These investments include real estate, commodities, private equity, hedge funds, and venture capital. They offer a variety of benefits, such as diversification, the potential for higher returns, and the ability to invest in non-traditional asset classes.

Conclusion

Equity shares are an important source of finance for companies. They represent ownership in a company and entitle the holder to voting rights, a share of profits, and ownership rights. Equity shareholders can benefit from capital appreciation and bonus issues and have the flexibility to liquidate their holdings whenever required. However, equity investments might carry a high degree of risk, and the value of the shares can fluctuate significantly.

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Frequently Asked Questions

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What are the differences between common shares and bonus shares?

Answer Field

Common shares provide regular ownership and voting rights, while bonus shares are additional shares given to shareholders without any cost, typically issued from a company's reserves.

How do voting rights with equity shares affect corporate decisions?

Answer Field

Equity shareholders have voting rights that allow them to influence key decisions like mergers, board appointments, and company policies.

What are the potential additional profits associated with investing in equity shares?

Answer Field

Investors can earn additional profits through dividends and capital appreciation, as equity shares can increase in value based on company performance.

How does the liquidity of equity shares compare to other types of shares?

Answer Field

Equity shares are highly liquid, meaning they can be easily traded on the stock market, unlike some other forms of investment like bonds or real estate.

What specific ownership rights do equity shareholders have compared to preference shareholders?

Answer Field

Equity shareholders have voting rights and participate in capital appreciation, while preference shareholders receive fixed dividends and have priority in asset distribution but usually lack voting rights.

How can equity shares be used to hedge against inflation?

Answer Field

Over the long term, equity shares tend to outperform inflation, making them a valuable investment for preserving and growing wealth in an inflationary environment.

What are the long-term vs. short-term benefits of holding equity shares?

Answer Field

Long-term benefits include higher capital gains and dividend payouts, while short-term benefits can come from price volatility and quick trading opportunities.

Are there any tax advantages or implications when investing in equity shares?

Answer Field

Equity shares may qualify for capital gains tax exemptions if held for a long-term period, while short-term gains are taxed at different rates depending on the holding period.

Equity shares may qualify for capital gains tax exemptions if held for a long-term period, while short-term gains are taxed at different rates depending on the holding period.

Answer Field

Equity shares may qualify for capital gains tax exemptions if held for a long-term period, while short-term gains are taxed at different rates depending on the holding period.

How does the risk of equity shares compare to that of other investment options like bonds or real estate?

Answer Field

Equity shares are considered riskier than bonds or real estate, but they offer higher returns in the long run, especially for investors willing to accept short-term volatility.

What are some practical steps for a beginner to start buying equity shares in the stock market?

Answer Field

Beginners can start by opening a Demat account and trading account with a registered broker, researching the stock market, and investing in blue-chip or well-established companies. 

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Bajaj Financial Securities Limited ("Bajaj Broking" or "Research Entity") is regulated by the Securities and Exchange Board of India ("SEBI") and is licensed to carry on the business of broking, depository services and related activities.  

This Report has been prepared by Bajaj Financial Securities Limited in the capacity of a Research Analyst having SEBI Registration No. INH000010043 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.  

This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Bajaj Financial Securities Limited and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. The information given in this report is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Bajaj Financial Securities Limited reserves the right to make modifications and alterations to this statement as may be required from time to time. Bajaj Financial Securities Limited or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Bajaj Financial Securities Limited is committed to providing independent and transparent recommendation to its clients. Neither Bajaj Financial Securities Limited nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of Bajaj Financial Securities Limited. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of Bajaj Financial Securities Limited and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.  

We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.  

Bajaj Financial Securities Limited and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies), mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. Bajaj Financial Securities Limited may have proprietary long/short position in the above-mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with Bajaj Financial Securities Limited.  

Bajaj Financial Securities Limited or its associates may have received compensation from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or Bajaj Financial Securities Limited’s associates may have financial interest in the subject company. Bajaj Financial Securities Limited, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance.  

Research analyst has served as an officer, director or employee of subject Company: No  

Bajaj Financial Securities Limited has financial interest in the subject companies: No  

Bajaj Financial Securities Limited’s Associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report.  

Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Bajaj Financial Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No  

Subject company may have been client during twelve months preceding the date of distribution of the research report.  

There were no instances of non-compliance by Bajaj Financial Securities Limited on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years. A graph of daily closing prices of the securities is also available at https://www.nseindia.com/

ANALYST CERTIFICATION

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.  

RISK DISCLOSURE ON DERIVATIVES

  • 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
  • On an average, loss makers registered net trading loss close to ₹ 50,000.
  • Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
  • Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.

SEBI study dated January 25, 2023 on “Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment”, wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22.

BROKERAGE DISCLAIMER

All leveraged intraday positions will be squared off on the same day. There is no restriction on the withdrawal of the unutilised margin amount. Brokerage will not exceed the SEBI prescribed limit. Visit : https://www.bajajbroking.in/pricing

MTF 

As subject to the provisions of SEBI Circular CIR/MRD/DP/54/2017 dated June 13, 2017, and the terms and conditions mentioned in the lights and obligations statement issued by the TM (if applicable).  

US INVESTING

International investment is not supervised by any regulatory body in India. Thus, any claim or dispute relating to such investment or enforcement of any agreement/contract /claim will not be under laws and regulations of the recognized stock exchanges and investor protection under Indian Securities Law. The account opening process will be carried out on Vested platform and Bajaj Financial Securities Limited will not have any role in it.  

MARKETSMITH / GOLDENPI / SOVEREIGN GOLD BONDS

Bajaj Financial Securities Limited is only distributor of this product. These are not exchange traded products and all disputes with respect to the distribution activity, would not have access to exchange investor redressal forum or Arbitration mechanism. Bajaj Financial Securities Limited is not a registered Investment Advisory. User discretion is required before investing. Client is requested to independently evaluate and/or consult their professional advisors before arriving at any conclusion to make any investment. The decision to invest shall be the sole responsibility of the Client and shall not hold Bajaj Financial Securities Limited, its employees and associates responsible for any losses, damages of any type whatsoever. 

IPO 

This should not be construed as soliciting investment. Investors’ discretion is required. Kindly consult your financial expert before investing. No need to issue cheques by investors while subscribing to IPO. Investments in securities markets are subject to market risks, read all the related documents carefully before investing.  

IPO FINANCING

IPO Financing is done through Bajaj Finance Limited. Bajaj Finance Limited (BFL or Lender) reserves the sole right to decide participation in any IPO and financing to the client shall be subject to credit assessment done by the lender. Also, BFL shall have full rights to decide the commercial terms for IPO and final application and financing shall be subject to all requirements being met by the client in a timely manner including documentation, account setup and payment of required Interest and Margin. Bajaj Finance Limited also reserves the exclusive rights to change any of the above-mentioned terms and conditions without prior notice to clients. The scheme margin is subject to change. UPI is mandatory to bid in all IPOs through our platform. As per exchange guidelines, all the UPI mandates will only be accepted till 5:00 PM on IPO closure day. 

SCREENERS 

Screeners is not Exchange-approved products and any disputes related to the same will not be dealt on the Exchange platform. 

SECURITIES 

Securities quoted are exemplary and not recommendatory. 

IPV 

Account would be open after all procedure relating to IPV and client due diligence is completed. 

IMAGES 

The images used are only for representation purpose. Proper due diligence has been done for the images and the image is not of any artist. The same is captured from royalty free sites. 

DISCLOSURE TO CLIENTS REGARDING PAYOUT OF FUNDS

As per SEBI circular no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/84 dated June 08, 2023, Stockbrokers are required to upstream the entire client funds lying with them to the Clearing Corporation. Based on client’s request the funds’ release request must be placed with the Clearing Corporation. Based on the internal process and cut-off timelines of the Clearing Corporation the funds will be released to the Stock Broker. In view of this new process, as specified by the regulatory and the cut-off time of Clearing Corporation/Banks processing the funds, Bajaj Financial Securities Limited cannot commit the exact time for releasing funds payout to its client. Clients are requested to note that, Bajaj Financial Securities Limited will not be responsible for any inconvenience caused to clients due to delay in release of funds payout, including fines, delayed charges, defaults, etc.