A share is a document which is issued by a company, registered with the stock exchange, by which the holder of the share becomes one of the owners of the company. These equity shares can be purchased from the stock market or from the company when it announces public issue of its stock. Equity is the extra or surplus of profit left over to be distributed between investors, after all the liabilities are paid off.
When a company is formed, the investors put in their funds by way of buying shares for the business to run. So the company becomes liable to repay this capital amount. A business in accounting terms is summed as total of liabilities and assets. So all liabilities have to be taken care off before the profits can be calculated and each shareholder’s interest in the business calculated. In case of bankruptcy, assets are disposed to pay off the secured creditors and once all liabilities are done with, if anything is left, it is distributed among the equity owners but if there is nothing left, the owner’s equity is left to zero.
A company issues a equity document to the shareholders by which they become one of the owners of the company. The shares can be purchased in the stock exchange too through the brokers when some other shareholder wants to sell off his lot of the shares. But here the price could be a little higher as it includes portion of the profits. On the contrast you run the risk of capital loss if you sell the shares at a lower price than what you had purchased for.
Features of Equity Shares:
- It is a financial instrument through which it bestows ownership rights to the investor in the company
- The owner has a right on the profits and on the company’s assets in case of liquidation of the company
- They have voting rights in the company
- They are distributed the surplus of profits after the interest is settled, taxes paid and depreciation provided and preference shareholders are cleared
- The financial standing, its progress and strategies for growth of the company determines the share prices
- These equity shares can be bought at the stock exchange, through stock brokers, online brokers and sometimes in banks and
- Though the creditors and preferential shareholders invest cash, they have no say in the conduct of business while the equity shareholders have full powers to direct the company.
Limitations of the Equity Shares:
The equity share holders have many limitations as far as income is concerned. Even when there are profits, they get their share at the last which means the amount of sharing gets reduced. The preferential shareholders and creditors are paid interest income even if the company is in loss but these equity shareholders get their share only if company makes huge profits.
Types of Equity Shares:
There are different types of equity shares which include:
Blue Chip Shares: These are the shares of companies which are well established and reputed in all fields. The Blue Chip companies include Reliance, ONGC, NTPC, SBI, ICICI, Tata Steels, Wipro, and a few others. The market capital of these companies is very high and scrips influence the Sansex and Nifty movement.
Income Shares: These companies have a stable share value and always pay high dividends. Since they have high dividend payout ratio, the profits of the company saved are less and so their growth opportunities are very less.
Growth Shares: These are shares of companies which are on top in their industry like Wipro in Computers, Tatas in steel, Bajaj in automobiles etc. The shares here have less dividend payout and so their growth rate is high.
Cyclical Shares: Some company’s performance keeps fluctuating like a business cycle meaning the share prices are affected with any variations in the economy. Sugar and fertiliser are two such industries.
Defensive Shares: The shares of these companies are not affected by the economical changes.
Speculative Shares: The shares here are traded on speculations. These shares are high risk in nature but also give very high returns in short terms. The scrips fall sharply suddenly so investors should always keep an eye on it always.
The shares cannot be put in one category as each has different characters and are overlapping each other.