Equity Shares: Meaning, Types, Features and Everything You Need to Know

Equity share is a long term source of finance issued by the companies to the general public. It is a share of ownership in the business. Equity shareholders have voting rights and a claim on the company’s assets and are entitled to a share of the profits in the form of dividends. They are non-redeemable in nature and unlike debt instruments, they do not promise any return. Equity shares are a high-risk, high-reward investment. The equity shares meaning is not just a simple transaction, it is a contract of ownership. Understanding the features of equity shares, their types, and the advantages and disadvantages of equity shares is the starting point for every informed equity investor.

What are Equity Shares?

Equity shares are long-term financing sources for any company. These shares are issued to the general public and are non-redeemable in nature, meaning they cannot be bought back by the company during its operational lifetime. Investors in such shares hold the right to vote, share profits, and claim assets of a company in the event of liquidation.

Understanding what is equity share also means understanding how their value is expressed, equity shares can be valued in multiple ways, including par value, face value, book value, and market value, each serving a different analytical purpose for investors and analysts.

In the broader context of equity shares meaning, these instruments form the foundation of capital markets worldwide. They allow businesses to raise funds without incurring debt, while giving investors direct participation in a company’s financial success. It is this dual benefit, for both the issuing company and the investor, that makes equity shares one of the most widely traded instruments in financial markets.

Table of Contents

1. What are Equity Shares?
2. Types of Equity Shares Available
3. Features of Equity Shares
4. Why Should You Invest in Equity Shares?
5. What are the Risks Associated with this Investment?
6. Alternative Investment Options

Types of Equity Shares Available

Ordinary Shares

Ordinary shares are the most common type of equity share issued by companies to raise funds for long-term operational and capital expenses. Holders of ordinary shares enjoy ownership benefits that give them exposure to various aspects of a company’s management and operations. An individual possessing a large number of these shares holds substantial voting rights, directly influencing key business decisions such as the appointment of directors and approval of major corporate actions.

Preference Equity Shares

Preference equity shares are issued to investors as a guarantee of cumulative dividend payment before returns are distributed among ordinary shareholders. However, preference shares do not carry voting rights or membership privileges associated with ordinary shares.

A further classification exists within preference shares, participating and non-participating. Holders of participating preference shares are entitled to a stipulated share of profits as well as bonus returns based on company performance during a given financial year. Non-participating preference shareholders, by contrast, receive only the fixed dividend and are not entitled to any additional profit sharing.

Bonus Shares

Bonus shares are issued out of a company’s retained earnings, distributing accumulated profits among existing investors in the form of additional shares rather than cash dividends. Importantly, bonus shares do not increase the total market capitalization of a company, they simply represent the capitalization of surplus funds generated from operations, redistributed proportionally among shareholders.

Rights Shares

Rights shares are issued by a company to the existing shareholders at a discount, allowing them to buy additional shares in the company before new shares are made available to the general public. This offer is only valid for a limited period and is usually used by companies to raise more capital for certain expenses or expansion plans.

Features of Equity Shares

The characteristics of equity shares distinguish them from other financial instruments and make them one of the most dynamic investment tools available in the stock market:

• Voting Rights: Most types of equity shares include voting rights, allowing investors to elect individuals responsible for running the business. Electing efficient management directly impacts a company’s annual turnover and, in turn, its dividend distribution to shareholders.
• Profit Participation: Equity shareholders are eligible to realize additional profits generated by a company during a fiscal year. This increases the total wealth of individual investors holding a considerable investment in equity shares of the company, especially during periods of strong financial performance.
• Tradability: Although equity shares are not repaid until a business closes down, shares already issued can be traded freely in the secondary capital market. This allows investors to pull their money out whenever they want, providing liquidity and the ability to accumulate wealth through capital appreciation. 
• Non-Redeemable Nature: Unlike debt instruments, equity shares are not redeemable during the company’s lifetime. They remain outstanding until the company is wound up, making them a permanent source of capital for the business.
• Residual Claim: Equity shareholders have a residual claim to the assets and earnings of a company, which means that they are paid after all other obligations such as debt and preference dividends have been met.
• Variable Returns: The returns on equity shares in the form of dividends are not fixed. They depend on the profitability of the company and the discretion of its board, which reflects both the risk and reward characteristics of equity shares.

Also Read: Difference Between Stock and Equity

Why Should You Invest in Equity Shares?

• High Income: The equity share market is an ideal segment of the capital market responsible for remarkable wealth creation. Returns are generated through two channels, capital appreciation of the share price over time and dividend income received during the holding period. For long-term investors, the compounding effect of both these return streams can be substantial.
• Hedge Against Inflation: Investing in profit making equity shares increases the real value of wealth of an investor over time. In the past the return on equity has been greater than the rate of inflation so that the money invested in equity shares has generally grown at a faster rate than the rate at which the value of money falls due to inflation. Therefore equity shares are one of the best long term hedges against inflation for the individual investors. 
• Portfolio Diversification: Those with a low appetite for risk, often prefer debt instruments, as they are less volatile. However, the stock market and bond market tend to be negatively correlated on aggregate demand. Equity markets can offer opportunities for profit when bonds are doing poorly. Equity shares are powerful diversification tools to construct a balanced, resilient investment portfolio.

What are the Risks Associated with this Investment?

The equity share market is the most volatile component of the stock market and is highly sensitive to even minor changes in economic and geopolitical factors. Returns to equity investments are paid only after all other obligations of a company have been satisfied, such as the repayment of debt and preference dividends. During a downtrend in the market, the production and profitability of a company are affected and the funds available for distribution to the equity shareholders are reduced.

This residual nature of equity returns is central to understanding the advantages and disadvantages of equity shares, while the upside is unlimited, the downside involves bearing losses ahead of all other stakeholders.

That said, the business cycle has market fluctuations built into it. However, equity shares may show lower returns in a downturn, but are historically set to recover when the economy gets back to speed. Those investors who hold their money for a very long time often see a great payoff in terms of capital appreciation. Patience is one of the best traits an equity investor can have.

Alternative Investment Options

Debt Securities

Equity shares have the maximum potential returns in the stock market but they also carry the maximum level of risk. Risk-averse investors seek the safety of debt instruments such as government bonds, corporate bonds and debentures. These securities offer fixed and predictable returns over a specified tenure with much lesser risk but also limit the possibility of large capital gains that equity shares can provide over a long period of time.

Mutual Funds

Mutual funds are a compromise on the high risk of direct equity investments and low returns of debt instruments. A mutual fund is an investment vehicle which pools money from a number of investors and invests in a diversified portfolio of assets such as equity shares, bonds and money market instruments. Unlike an individual investor who invests his own money. It provides exposure to the equity market with risk spread across a broader base. For those investors who don’t have the time or the skill to research individual equity shares, mutual funds managed by professional fund managers are a practical and accessible alternative.

Fixed Deposits

Fixed deposits are considered to be one of the safest investment options. They offer assured returns at a pre-decided interest rate for a fixed period. From a market risk perspective, fixed deposits are almost risk-free and hence suitable for capital preservation. Returns are generally lower than the inflation-adjusted equity returns in the long term. They are more appropriate for investors who have a very low risk appetite or are looking for a safe place to park money for the short term than for building wealth over the long term.

Conclusion
Equity shares still remain one of the most powerful tools at the disposal of investors to create long term wealth. Understanding what is equity share, getting a practical understanding of equity shares meaning, knowing the features of equity shares, characteristics of equity shares and advantages and disadvantages of equity shares equips investors with the foundation to make confident, informed decisions.