An equity share or common share is an investment type of securities issued by a company. It gives partial ownership of a public company to the buyer. Holders of this share type are entitled to a part of the company's profits and voting rights on corporate matters. Besides, equity shares are the main source of funding for the firm.
The total number of shares a company can issue depends on its shares, but each share gives the shareholder equal ownership and rights.
What shareholders get by investing in equity shares
As a rule, shareholders get dividends from investing in equity shares. In addition to dividends, the owners of shares also receive profits from the increase in the value of securities. The advantage of equity shares is that they usually outperform preferred stocks and bonds and offer higher long-term returns.
Basic characteristics of equity shares:
- No maturity periods. The share capital is non-redeemable and remains permanently in the company and is returned to shareholders only upon termination of the company.
- Voting rights. Equity investors have the right to vote at company meetings.
- Dividend rate. There is no fixed dividend rate for shareholders, it depends on the availability of free funds.
- Control rights. Equity investors have the right to elect and control the management of the company, as well as make decisions about the activities of the enterprise.
Ways to make an investment in equity shares
CFD trading is one of the options to trade equity shares. CFDs or Contracts for Difference, are a modern way to trade shares of the largest global companies without buying the underlying asset.
Besides, CFD equity shares trading gives traders the ability to open long and short positions by choosing whether the share price will increase or decrease. Traders gain an advantage in case if they predicted the price movement correctly.
Moreover, with CFDs, you can trade with leverage, more trading opportunities, and with less equity capital.
Benefits of investing in equity shares
Equity shares are one of the most important sources of capital and have certain advantages, which are outlined below:
- Liquidity: share prices are directly proportional to market fluctuations or a company's earnings and can be easily traded on the capital market.
- Profitability: shareholders benefit in two ways, by receiving annual dividends and profits in case of an increase in the value of their investments.
- Control over management: Shareholders holding a significant percentage of shares can significantly influence the management of the company.
Types of equity shares to invest
- Common shares. Common or ordinary shares are the most frequently traded stocks. This type of shares makes investors co-owners of a corporation and gives them not only a portion of all profit distributions but also the voting rights at AGM.
- Preference shares (preferred stocks). Preferred shares give the investors the right to receive a fixed income that is much more reliable and predictable than that provided by common stocks. Preference shares have an initial issue price, also known as a par value, and a coupon rate. The shareholder annually receives dividends equal to the par value multiplied by the coupon rate.
Preferred shareholder status
Preferred shareholders always have priority over ordinary shareholders. The company must pay outstanding payments to the holders of preferred shares before it can distribute dividends on common shares. If the company is dissolved as a result of bankruptcy proceedings, holders of preferred shares must be paid the full amount before ordinary shareholders can receive anything at all. Preferred shareholders, however, give up one important right: they cannot vote at the AGM. Consequently, holders of preferred shares cannot influence the strategic direction of the corporation.
- Convertible Preferred Shares. Convertible preferred shares are a division of preferred stocks. These shares can be exchanged for common shares at a fixed ratio known as the conversion ratio.
What you need to know about investing in equity shares
For a company to issue common stock, it should first arrange for an initial public offering (IPO). An IPO is a great way for an organization to raise additional capital to expand its business. Like other securities, equity shares are traded in the stock market.
Equity shares are those shares on which dividends are paid only when, after the payment of a fixed dividend rate, the holders of the preferred shares remain in profit. There is no fixed dividend rate on common shares. If there is no profit or insufficient profit in a particular year, the stock will get nothing. If the company makes more profits, they receive a higher dividend rate.
Shareholders take on both dividends and return on capital risks. Investors looking to invest in securely fixed income securities are not attractive to such stocks.
Reasons to make the investment in equity shares
Investing in equity shares has the following advantages, such as:
- Probability of the high profit. The stock market is the ideal capital market segment responsible for potential significant returns for investors. Potential profit is achieved not only by increasing the value of such securities but also by high dividend income received by individuals.
- Inflation hedge. Investing in profitable stocks improves people's living standards by increasing the value of assets. Money invested in stocks brings in multiple returns that exceed the rate at which an individual's purchasing power declines due to inflation. Thus, the real value of investment tends to increase over time.
- Portfolio diversification. Investors with low-risk appetite tend to stick to debt instruments because they are less volatile. However, stock market fluctuations are inversely proportional to the demand. Thus, when the stock market is falling, risk-averse investors can profit from investing in the best stocks by investing in the stock market.
Risks associated with an investment in equity shares
The stock market is usually the most volatile segment of the stock market and is heavily influenced by minor fluctuations. Equity shares income is paid after all other obligations of the company have been fulfilled. During a market downturn, this affects the production cycle of the business, which reduces the profit that the business can generate. This smaller share of the profits is used to cover all existing liabilities before the funds are paid out as equity income. Thus, stock markets tend to suffer during a market downturn.
Market fluctuations are part of a business cycle that is associated with ups and downs according to the economic situation in the country. Even if stocks are showing lower returns at a certain point in time, they will surely rise when the economy recovers.
Besides, equity investments rise in value over time as usual. Thus, if funds are held blocked for a long period, their value will surely increase significantly in the future.
How do equity shares prices change?
Stocks are volatile instruments, and their prices change every day. There are many reasons for the movements of stock prices. For example, supply and demand: if the number of people who want to buy a share is greater than those who want to sell it, then the share price rises. Conversely, if the number of people who want to sell a stock is greater than those who want to buy it, then the share price falls.
The news background also plays an important role. If equity investors are faced with positive news about the company, such as plans for growth or expansion, government approval of projects, then equity share prices rise. On the contrary, any negative news, such as lawsuits against the company or the abandonment of the project, causes its share price to fall. Even stock analysts' estimates of the company's future value are based on the company's earnings forecast. Ultimately, anything that increases a company's profits and value causes the price of its shares to rise and vice versa. In addition, you can use financial ratios to find out the intrinsic value of a company.
Takeaways of investing in equity shares
Equity shares refer to ordinary shares issued by a company for public trading. These shares have voting rights and dividends, but dividend payments are not always provided. Equity investors are the true owners of the company. They control the work of the company. Shareholders have the right to vote and control the affairs of the company. Each share carries one vote, and the shareholder has votes equal to the number of shares he owns.
Why are equity shares needed? Equity shares are small units that form the total capital of the organization. When an investor purchases a share in a company, he/she contributes to the total capital of the business and becomes a shareholder. For the company, such a contribution is like an obligation under which it must return to the shareholder. Equity investors receive income from their investments through dividends and capital gains. Along with the monetary benefits, the holders of such shares also receive the right to vote on the most important issues of the company. In essence, they are viewed as owners of a company in which ownership is limited to the size of the shares they own.
Overall, equity shares are the main source of financing for the firm issued to the general public
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