What are Equity Shares?

Meaning and Definition of Equity Shares

Equity shares, also known as ordinary shares, are the smallest portion of a company’s share capital. These are issued to raise funds from investors. They entitle shareholders to a proportional claim on the company’s profits, voting rights, and residual assets after all liabilities have been paid. If the company approves a dividend, it is distributed among the shareholders.

And the answer to the obvious query: Yes, equity shareholders are the real owners of the company and have a right to vote in key decisions of the company, thereby participating in the corporate affairs. However, the shares traded on the stock exchange are valued at a premium. As a shareholder, your proportionate ownership is represented by the face value of the share, which is relatively low compared to the company's overall size.

Features of Equity Shares

Equity shares are one of the most popular investment assets worldwide. Due to the simplicity of concept, ease of trade, and universal acceptance, equity shares are quite popular. From the perspective of their role in a company, here are the most critical features:

• Ownership Rights: Shareholders become part-owners of the company and share its profits and losses.

• Voting Rights: They have the right to vote on significant corporate matters, such as electing directors and approving major policies.

• Dividend Entitlement: Equity shareholders may receive dividends; however, these are not guaranteed and depend on the company’s profitability and the board's decisions.

• Residual Claim: In the event of liquidation, equity shareholders have a claim on the company’s assets only after debts and preference shares are paid off.

Additionally, equity shares are easily transferable and, unlike fixed-income securities, they do not have a maturity date.

Types of Equity Shares

Here are the most common types of equity shares from an Indian perspective:

• Ordinary Equity Shares: These are the standard shares that give investors ownership, voting rights, and dividends based on the company's profits.

• Right Shares: Issued to existing shareholders at a discounted price, allowing them to maintain their ownership proportion when the company raises additional capital.

• Bonus Shares: Free additional shares issued to existing shareholders out of the company’s reserves or profits, increasing their shareholding without extra investment.

• Sweat Equity Shares: Given to employees or directors at a discount or for non-cash consideration as a reward for their contributions, such as intellectual property or exceptional service.

Advantages of Equity Shares

Equity shares offer a wide range of advantages for the issuer (the company) and the shareholders (the investors). Here is a table describing the most common advantages:

Equity Financing: Investors in a Company

FAQs

What are equity shares in simple words?

Equity shares represent ownership in a company, giving investors rights to profits, voting, and residual assets.

How do equity shareholders earn money?

Shareholders earn through dividends declared by the company and capital gains if the share price rises.

Are equity shares risky?

Yes, equity shares carry market and business risks, as returns depend on the company's performance and stock prices.

What is the difference between equity shares and preference shares?

Equity shares have voting rights and variable returns, while preference shares get fixed dividends and priority in payouts.

Why do companies issue equity shares?

Companies issue equity shares to raise permanent capital, thereby avoiding the creation of debt obligations.