Equity shares are nothing but a company’s total business capital divided into smaller units and available for purchase to investors. This is generally done to raise capital by allowing promoters, institutional investors, and retailers to invest in the company’s business and subsequently gain from their holdings. Equity shares are also commonly called stocks and serve as a source of long term finance for the company. When an investor buys an equity share, it creates liability on the company to give the shareholder returns on his/her investment. A shareholder then owns a part of the company, in which he has invested by buying equity shares. The returns are given to the investor in terms of dividends, from the profit earned by the company through its business operations earned by the company through its business operations. Depending on the percentage of stock dividend yield per annum, it would take certain number of years calculate the equity duration and fully repay the investor’s capital. Having learned equity shares meaning, let us know the reasons behind the issuance of equity shares by a company.
To understand equity shares meaning, it is necessary to know the important role they play in the corporate market. They are the basis of the existence of different stock exchanges. In general, they are beneficial for both the companies which are issuing equity shares and for the investors as well. How? We will discuss the same in the next section.
Importance of Equity Shares
There are a number of ways in which equity shares are beneficial for both companies and investors. This is precisely why the equity shares market has grown over the years, allowing different companies and investors to be profitable for each other.
Importance of Equity Shares for Companies
Companies are the source of equity shares. They issue shares for a number of reasons, which play a crucial role in their existence and future growth as well.
- The primary reason for the companies to issue equity shares is to raise capital. The company divides its capital into smaller units and offers those for purchase in return for giving ownership rights and profit sharing with the shareholders, which is also the equity shares meaning.
- In many cases, the equity shares are also issued by some companies to consolidate their debt. Raising money to consolidate debt is far better than paying exorbitant sums of money in interest for debt financing. This shows that there is no fixed equity shares meaning when it comes to the reason for its issuance.
- Some companies also understand equity shares meaning as a way to make themselves visible via listing on the stock exchange. With this market visibility, the company also builds its brand value.
Importance of Equity Shares for Investors
Not only companies, but investors also have their own equity shares meaning and their own reasons to purchase equity shares.
- Equity shares are highly liquid and can be purchased and sold as per convenience.
- Equity shares meaning is also defined by their potential to generate high returns, which is why many investors are lured towards them.
- The investor also gets part of ownership in the company.
- Equity shares meaning for investors is also defined as an important tool to hedge against inflation.
- By buying equity shares, an investor also diversifies his investment portfolio, which in turn, reduces risk.
It is important to gain proper knowledge before starting your investment journey.
Pros and Cons of Equity Shares
Just like every other investment instrument, equity shares meaning also comes with its own pros and cons. Let us have a look at them briefly.
Pros of Equity Shares
- For companies, equity shares are the best financial instrument to raise capital and use the proceeds to expand their business operation and nurture growth. On the other hand, the investors see equity shares meaning as a way to get higher returns and dividends.
- Companies can consolidate their debt from the capital raised by issuing equity shares. The investors in this case do not have to pay to eliminate the company’s debt which means that even if the debt-ridden company is making profits, the investor is liable to get his share of returns.
- Companies can enhance their market presence as well by getting listed on the stock exchange. These stock exchanges allow investors to easily buy and sell equity shares at their ease.
Cons of Equity Shares
- Not likely but some companies do misuse this option to issue equity shares unnecessarily in order to raise capital even though there is no such need. The investors, on the other hand, get lured away from such investment opportunities and end up investing in a company with no growth potential.
- Some debt-ridden companies get themselves listed on stock exchanges and manipulate investors to buy their equity shares. This they do through marketing, creating hype, and showing fake growth potentials.
Despite having a couple of cons, equity shares are considered to be relatively safer and a great investment option for investors to get higher returns both in the short and long term. Equity shares allow both companies and investors to achieve their financial goals.
When it comes to investing in equity shares, the words of praise are not only ‘safer’ and ‘high returns’, but investing in equity shares these days is extremely effortless and can be done with fingertips.
How to Invest in Equity Shares
Investing in equity shares can be done online, right at your convenience. There are a number of brokers who allow you to invest in equity shares through their web portals and client applications. Here are the steps that you need to follow to invest in equity shares:
- Open a Demat account with a broker of your choice. The process is completely hassle-free, in which you can complete your KYC online after entering your personal details.
- Once you get your Demat account, choose a stock (equity share) of your choice and as per your risk appetite, investment ability, and financial goals.
- You can choose to buy the equity shares either at market price or at a limit price, which you can set in your investment terminal.
- Once the equity shares are purchased, the same will be reflected on your dashboard.
Investing in equity shares is easier than ever.
So we have learned equity shares meaning and also seen its importance, benefits, and pros and cons for both companies and investors. We have also read how one can easily invest in equity shares within almost no time. However, you should keep in mind that investing is not a day’s work to do, rather, it requires knowledge, understanding of the company’s fundamentals, knowing your risk appetite, and making smart moves whenever necessary. Make sure to start your investment journey with all the knowledge that you need in order to remain for long in the market and keep earning profits from your investments.