What are Equity Shares? Features, Merits, Advantages and Disadvantage

Equity shares are a type of financial instrument representing company ownership. Equity shareholders are entitled to a portion of the company's profits and have voting rights on company matters. This blog will explore the meaning, definition, features, merits, examples, advantages, and disadvantages of equity shares.

Meaning and Definition of Equity Shares:

Equity shares are a type of shares issued by a company to raise capital. These shares are also known as common shares or ordinary shares. Equity shareholders are the owners of the company and are entitled to a portion of the company's profits. They also have voting rights on company matters and can elect the board of directors.

Features of Equity Shares:

1. Voting Rights: Equity shareholders have the right to vote on company matters, including the election of the board of directors and major company decisions.
2. Dividend: Equity shareholders are entitled to a portion of the company's profits in the form of dividends. The amount of dividends depends on the company's performance.
3. Residual Claim: Equity shareholders have a residual claim on the company's assets after all other claims are settled. In the event of liquidation, equity shareholders are paid last.
4. Transferability: Equity shares are freely transferable, and shareholders can sell them in the stock market.
5. Risk: Equity shareholders are exposed to higher risk as their returns are not fixed and depend on the company's performance.

Merits of Equity Shares:

1. Ownership: Equity shareholders have ownership rights in the company and can participate in the company's decision-making process.
2. Higher Returns: Equity shares provide higher returns than other investment options in the long run.
3. Liquidity: Equity shares are highly liquid as they can be easily bought and sold in the stock market.
4. Capital Appreciation: Equity shares have the potential to appreciate in value over time, providing capital gains to the shareholders.

Examples of Equity Shares:

Some examples of companies that have issued equity shares include Apple, Microsoft, Amazon, and Google.

Advantages of Equity Shares:

1. Equity shares provide a high rate of return compared to other investment options.
2. Equity shares provide shareholders ownership rights and voting rights, allowing them to participate in the company's decision-making process.
3. Equity shares are highly liquid, and shareholders can easily buy and sell shares in the stock market.

Disadvantages of Equity Shares:

1. Equity shares are riskier than other investment options as their returns are not fixed and depend on the company's performance.
2. Equity shareholders are the last to be paid in the event of liquidation, and they may lose their entire investment.
3. Equity shares may not provide regular income in the form of dividends.

What is the difference between equity shares and preference shares?

ANS: Equity shares represent ownership in a company and provide voting rights to shareholders, while preference shares provide a fixed rate of return and do not offer voting rights.

How do I buy equity shares?

ANS: You can buy equity shares through a stockbroker or online trading platform. You will need to open a demat account to hold the shares electronically.

Can I sell my equity shares at any time?

ANS: Yes, equity shares are freely transferable and can be sold anytime in the stock market.

What is the role of equity shareholders in a company?

ANS: Equity shareholders have ownership rights in the company and can participate in the company's decision-making process. They also have a residual claim on the company's assets.

What happens to the value of equity shares if the company's performance declines?

ANS: The value of equity shares is directly linked to the company's performance. If the company's performance declines, the value of the equity shares may also decrease.

Can a company issue equity shares without offering voting rights to the shareholders?

ANS: Yes, a company can issue non-voting equity shares. These shares provide ownership in the company but do not offer voting rights.

Can a company issue different classes of equity shares?

ANS: Yes, a company can issue different classes of equity shares, each with different rights and privileges.

What is the difference between equity shares and debentures?

ANS: Equity shares represent ownership in a company, while debentures are a type of debt instrument that provide a fixed rate of return.

How are equity shares taxed?

ANS: The dividends received from equity shares are taxed as per the applicable tax laws. Capital gains from the sale of equity shares are also subject to tax.

What is the role of stock exchanges in trading equity shares?

ANS: Stock exchanges provide a platform for buying and selling equity shares. They also provide transparency and liquidity to the market by ensuring fair and efficient trading practices.

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In conclusion

equity shares are a popular investment option providing shareholders ownership and voting rights. Equity shareholders are entitled to a portion of the company's profits in the form of dividends and have a residual claim on the company's assets. While equity shares provide higher returns in the long run, they are also riskier than other investment options.