Equity Shares 101: Everything You Need To Know

Various funding options are accessible to businesses whenever they require capital for operations or expansion. Businesses attract investors via the sale of equity shares, which act as a ticket to ownership in the company. But are you familiar with the concept of equity shares? Let us explore this in the blog.

What Are Equity Shares?

Any business may secure funding for the long run via the sale of equity shares. Equity shares are open to the public and are non-redeemable. Equity shares confer the power to vote and entitle the holder to share in the company's income and ownership of its assets to its investors. Several ways to describe the value of equity shares are through par, book, face and market value.

• Par Value

Par value, or face value, refers to the nominal value of a financial instrument, such as a bond or a stock, based on the company’s valuation. It represents the initial value assigned to the security during issuance.

• Book Value

Book value, or net asset value (NAV), refers to an entity’s total worth or equity. It accounts for the value of a company’s assets that shareholders would receive in liquidation by subtracting liabilities from assets.

• Market Value

It is the current price at which a financial instrument or asset can be bought or sold in the open/secondary market.

Characteristics Of Equity Shares

Equity shares provide unique rights to the shareholders and, as an investment, stand out among financial instruments. Let us examine what makes equity shares unique and how they might benefit you.

• Voting Rights

The voting rights granted to owners by equity shares are among its most potent aspects. You have a say in the critical choices that affect the company's future and a vote for every share you hold.

• Dividend Payments

The potential for dividend payments is another advantage of holding equity shares. Companies often pay out dividends to their shareholders when they start to make a profit.

Different Types Of Equity Shares

Given below are the different types of equity shares which a company issues:

• Ordinary Equity Shares

Ordinary or common equity shares represent a company's primary form of ownership. These shares are the most common type of equity shares issued by companies. The shareholders holding ordinary shares are entitled to voting rights and receive dividends distributed by a company.

• Bonus Shares

As the name implies, bonus shares are equities that companies provide to current shareholders at no extra cost. The bonus share allows companies to turn their retained profits into equity. Instead of paying dividends, firms often provide bonus shares to the shareholders. It is important to note that companies distribute bonus shares pro-rata.

• Preference Shares

Preferred stock, or preference shares, is a type of corporate stock that allows stockholders to receive dividend payments before expected stock payouts. In the event of bankruptcy, preferred stockholders can get the first access over the common shareholders to the payments from the company's assets. In contrast to common shareholders, preferred stockholders do not have any voting rights.

• Right Shares

Right shares are when a company allows its current shareholders to buy more shares at a specific price and within a set time frame. This means that before an issuer makes their new stock available to the public, certain stakeholders have the right to buy these shares.

The right shares are also issued on a pro-rata basis by firms, much like bonus shares. So, if a shareholder owns 1% of the current shareholding and the firm is issuing 10,00,000 additional shares, the shareholder is entitled to 100,000 shares.

• Sweat Equity Shares And ESOPs

Sweat Equity and Employee Stock Ownership Plans (ESOPs) are both mechanisms that allow employees to have ownership in the share and success of the company they work for. Many businesses try to keep good employees around by giving employees a share in the company's assets and ownership.

As a kind of performance-based compensation, sweat equity shares are often issued by companies to directors and workers. "Sweat equity" is shorthand for the in-kind, usually non-monetary, work an employee puts in for their employer.

ESOPs are options that entitle an employee to buy a company’s shares at a specified price in the future. It is an incentive to retain the top-performing employees.

• Non-Voting Shares

Non-voting shares were first introduced in the Companies (Amendment) Act of 2000. The voting rights that come with most equity shares directly result from the ownership position they represent. But sometimes businesses might offer shares with the stipulation that the holders would have varying voting rights or none.

Categories Of Share Capital

• Authorised Share Capital

The Memorandum of Association of every public limited company must include an authorised share capital amount. A corporation may raise this much by selling equity shares.

• Issued Share Capital

Their nominal value represents all of the company's issued shares. Say a corporation has issued 200,000 shares of stock with a nominal value of INR 10 each. The issued share capital would be INR 20 lakh rupees in this case.

• Subscribed Share Capital

This term describes the portion of issued capital that investors have purchased. If the investors in the previous example bought 150,000 business shares, its subscribed capital would be INR 15 lakh.

• Paid-Up Capital

A company's paid-up capital is the sum investors have paid in exchange for their equity shares. It can happen that subscribers have not purchased all the shares being issued, which is how it differs from subscribed capital.

How Short-term Investments Work Through Equity?

Investing in stocks and other forms of short-term equity involves purchasing and selling company shares within a short time frame from recognised stock exchanges, referred to as the secondary market or through an Initial Public Offering (IPO), called the primary market. At the time of listing of the IPO on the stock markets, the price may be higher than the issue price. This may be due to the early enthusiasm and demand for them. Investors may be able to sell their shares for a profit due to this price change, giving them listing gains.

You must take great care when deciding which IPOs to invest in. Factors such as the financial health of the firm, market circumstances, and industry trends determine the profitability of short-term investments. Not all IPOs promise immediate gains. To make educated selections, novice investors might consider consulting with financial experts.

You should know that short-term investments carry a higher risk and the potential for faster rewards. If you want to succeed in the stock market, you must arm yourself with knowledge, exercise caution, and, if necessary, seek expert financial advice.

Conclusion

By buying equity shares, investors may get exposure to the corporate sector and a voice in the expansion of a company. The capacity to vote and the prospect of income and capital gains are advantages but pose business risks. You need to know what you're doing, exercise caution, and have a strategy before investing in equity shares.

An emerging method of buying a company’s ownership is through startup equity. Visit Grip Invest and stay updated with curated high-growth potential alternative investment opportunities.

Frequently Asked Questions

1. Are all shareholders subject to taxation on dividends?

All shareholders, including individuals, Hindu Undivided Families (HUFs), and corporations, are subject to taxation on dividends.

2. How are equity shares different from bonds?

Bonds are a type of debt financing that enables businesses to borrow money from investors, as opposed to equity, which signifies ownership in a firm. Bonds are unique because they provide investors with a fixed interest income, while returns from equity shares are unpredictable.

3. How is early-stage startup capital utilised?

With the support of early-stage funding, a service or product may be established. The gathered funds could also fund marketing, technological advancement and product development. The money could also be used to increase customer base and sales.

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