Last Updated: Jun 07, 2022 Value Broking 7 Mins 1.6K

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You’re probably wondering right now, “What are equity shares? What is the meaning of equity shares? Equity shares definition: Investing in equity shares is one of the most common ways to earn a high profit in the stock market. Many investors hope that equity shares will provide them with a high return as they have historically done. The Nifty 50 Index, India’s benchmark index, delivered an annual compound growth rate of 8.81% in the decade between 2011 and 2020. In other words, a person who invested INR 5,000 in the Nifty 50 in 2011 would have made INR 11 630 in 2020. 

BSE Sensex Index has grown at a compound annual growth rate of 11.12% since 2011. An investor would have received INR 14,350 in 2020 if they invested INR 5,000 in BSE Sensex in 2011.

Classification of Shares

To understand equity shares meaning well, you must understand what are equity shares along with the classification of shares depending on the followings:

  • Share capital: The price of equity shares gets determined by the amount raised by a particular company by issuing shares. A company can raise more share capital by issuing more Initial Public Offerings (IPOs). 
  • Authorized Share Capital: Companies, in their Memorandum of Association, should set out the maximum amount of capital they can raise by issuing equity shares. 
  • Issued Share Capital: Specifically, this refers to the portion of the company’s capital that has been made available to investors through the issuance of equity shares. 
  • Subscribed Share Capital: The subscribed share capital represents the portion of the issued capital that investors have taken up.
  • Paid-Up Capital: Paid-up capital refers to the money paid by investors for holding stocks of a company. 
  • Bonus Shares: A company provided free of charge to existing shareholders are known as bonus shares. 
  • Rights Shares: A company may offer new shares to its existing shareholders – for a price and within a specific time frame – before they go on sale. 
  • Sweat Equity Shares: As an employee, you can earn sweat equity shares from the company if you have made a significant contribution. 
  • Voting And Non-Voting Shares: Although most shares hold voting rights, the company can issue differential shares with zero voting rights to employees who have made significant contributions.

Equity Shares: How to Buy?

To invest in the stock market, you’ll need three accounts:

  • Demat Account – store your shares. 
  • Trading Account – where you will place buy and sell orders with a stockbroker registered with a stock exchange.
  • Linked Bank Account – where you will place the purchase orders

Stocks are purchasable through two primary sources: 

  • IPO – When a company announces its shares for the first time, called an IPO. Investors can apply for an IPO through their net banking account or use the stock exchange to bid for the company’s shares.
  • Stock Market – You can buy or sell shares throughout the year on the stock markets by following these steps:
  1. Create a Demat account and trading account.
  2. The trading account should be linkable to your bank account
  3. Select shares that you would like to buy from your trading account.
  4. Determine the price.
  5. Transfer the funds and complete the transaction.

Features of Investing in Equity Shares                               

  1. You can vote if you are a shareholder of the company. Consequently, purchasing equity shares gives you influence and ownership over the company. You can even take part in shareholders’ or any other important meetings.
  2. They keep their equity share capital with the company. They can only withdraw their shares if the company closes.
  3. A fixed dividend rate for the equity shares of an enterprise does not create a sense of accountability or obligation. Companies’ shareholders acquire a part of its ownership, making them the owners of its assets. Additionally, shareholders can benefit from the profits of a company through dividends. Under an increase in the share’s value, they can indirectly profit from profits made by the company over time.
  4. A diversified portfolio helps investors manage risk and protects them from the volatility of stock markets. The equity markets provide investors with an opportunity to diversify their portfolios. Investors benefit from diversification because an outperforming sector can compensate for an underperforming industry.
  5. When you purchase equity shares, you have the option of quickly selling them on the stock exchange. Liquidity refers to the volume of shares traded on the stock exchange. Stock traders can trade equity shares easily on the stock exchange. When you require cash quickly, you can easily sell your stocks on the exchange and receive the money credited to your account. Therefore, the equity market is appealing since you can find buyers who will purchase your stocks during the market session.
  6. In addition, equity shares offer several tax advantages. Capital gains are taxable at a much lower rate than in other countries. There is no lock-in period to Equity shares from a taxation standpoint. 
  7. Shareholders of an equity company typically have a right to a residual claim on the company’s assets and income, which depends on what’s leftover after all stakeholder claims (debentures, lenders, etc.) have got settled.
  8. Equities provide investors with another advantage: stock splits. It is when shares get divided into parts, and the price of shares gets reduced, increasing the interest of investors. A stock split proves to be very beneficial for investors in the long run as lower share prices lead to higher volumes and, therefore, higher prices if a company is performing well.

Benefits of Investing in Equity Shares                  

In addition to providing certain benefits, equity shares also offer the following: 

High Earning Potential

When you invest in equity shares, you have two earning options:

  1. Gains in the capital due to increases in stock prices – An issuer of shares can sell them on a stock exchange for investors to trade in them and adjust their investments accordingly. The price of an issuer’s shares can fluctuate depending on the demand and supply of a given share. When the price of a stock increases and a limited supply of that stock remains, you have an opportunity to generate wealth.
  2. Investing in companies that declare dividends every year can add to your regular income – Suppose the company shares profits by declaring a dividend. If you invest in companies that declare dividends every year, you may be able to claim the dividends.

Inflation Protection

If you keep your fund in a savings account, you might not beat inflation rates at all times. Therefore, many investors choose financial instruments that yield a greater return, such as equity shares, so that they maintain the purchasing power of their funds.

The current inflation rate in India is around 4 percent. It means a product purchased today will be worth INR 104 next year. Or, the price of a product will double in 10 years.

To maximize your returns on savings, you must invest them in generating returns that exceed the inflation rate. 

Diversification

Investing is all about selecting and acquiring assets that can generate profit. The different investment options get categorized into asset classes such as equity, bonds, real estate, and commodities.

In other words, it is prudent to invest in different asset classes so that negative performance in one will not impact your total returns. Even if the interest rate on fixed deposits drops, but the value of stocks you own rises, you can still generate a reasonable income. You can reduce risk and gain steady returns by investing in multiple asset classes through diversification.

Conclusion

Before you trade and invest in the stock market, you must know the meaning of equity shares. Hope this article helps you understand different aspects of equity shares, and equity shares means.