Equity Shares 101: Everything You Need To Know

Equity shares are among the most recognised instruments in the Indian stock market. They represent partial ownership in a company. This ownership may provide voting rights, eligibility for dividends if declared, and potential returns from the long-term appreciation in the company’s value.

This article explains what equity shares are, their key characteristics, different types, categories of share capital, and how investing through equity works.

Table of contents

• What are equity shares?
• Characteristics of equity shares
• Different types of equity shares
• Categories of share capital
• How short-term investments work through equity

What are equity shares?

Equity shares, commonly known as stocks, represent a unit of ownership in a company. Equity shareholders are partial owners of the company. For instance, if a company has issued 1 lakh shares and an investor holds 1,000 shares, they own 1% of the company. These shares are traded on authorised stock exchanges in India such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Equity shareholders may receive voting rights, enabling them to participate in decisions presented at shareholder meetings. While equity shares do not offer fixed returns, investors may receive dividends if declared by the company and may benefit from potential capital appreciation if share prices rise.

Equity shares involve market-related risks. Their value may decline due to company performance or broader market movements, especially over short to medium periods. They are generally considered high-risk investments and may be more suitable for investors with a long-term horizon and a high tolerance for market volatility.

Read Also: Equity Share Capital: Meaning, Types, Features and Benefits

Characteristics of equity shares

Ownership rights

Equity shareholders hold partial ownership in the company, which may allow them to vote at annual general meetings (AGMs) and participate in certain corporate decisions.

Dividend entitlement

Equity shareholders may receive dividends if declared by the company. These payouts depend on profitability, internal policies and the discretion of the board of directors and are not assured.

Variable returns

Potential returns from equity shares vary based on market conditions and company performance. While equity shares are relatively more volatile compared to debt instruments, they may offer the potential for wealth-building over time.

Transferability

Equity shares can be bought and sold on authorised stock exchanges (subject to demand/supply), offering liquidity and ease of entry and exit for investors.

Different types of equity shares

Ordinary equity shares

These are standard equity shares offering voting rights and eligibility for potential dividends when declared. Holders participate in the company’s growth and bear associated risks.

Bonus shares

Bonus shares are additional shares issued to existing shareholders at no cost, usually in proportion to their current holdings. They are issued from the company’s accumulated reserves and are allotted on a pro rata basis.

Rights shares

Rights shares are offered to existing shareholders at a discounted price before being offered to the public. This provides existing investors an opportunity to increase their shareholding.

Sweat equity shares

These shares are issued to employees or directors as recognition for their contributions. They may come with transfer restrictions for a specified period.

Voting and non-voting shares

While most equity shares carry voting rights, some companies may issue shares with differential voting rights—either reduced or enhanced voting power. These shares may offer different voting entitlements while still allowing holders to receive dividends as specified.

Preference shares

Preference shares provide priority over equity shareholders in receiving dividends and repayment of capital. They typically carry a fixed dividend and have limited or no voting rights (except in specific cases defined by law). Because their returns are usually fixed, they generally offer limited participation in the company’s growth compared to ordinary equity shares.

Read Also: Mutual Funds vs Equities: Key Differences

Categories of share capital

Companies issue equity shares to raise capital, which forms part of their equity on the balance sheet.

Authorised capital

This is the maximum capital a company is permitted to raise as specified in its Memorandum of Association (MOA). The company must amend its MOA to increase this limit.

Issued capital

Issued capital is the portion of authorised capital offered to investors for subscription. It may be lower than the authorised capital.

Subscribed capital

Subscribed capital is the part of issued capital that investors have agreed to buy.

Paid-up capital

Paid-up capital represents the actual amount received by the company from shareholders for the shares issued.

How short-term investments work through equity

Short-term equity investing involves buying and selling shares within a short duration through the secondary market or by participating in an Initial Public Offering (IPO) in the primary market.

After a company lists its IPO on the stock exchange, the share price may move above or below the issue price depending on demand, market sentiment and other fundamental factors. In some cases, this may provide listing gains, but outcomes vary across IPOs.

Selecting suitable IPOs requires detailed research, including an assessment of the company’s financials, industry environment and market conditions. IPO investing involves uncertainties, and results may not always be favourable. Seeking guidance from a registered financial professional may be helpful for beginners.

Short-term equity strategies involve relatively higher volatility and may not be suitable for individuals with a low risk appetite. Investors need to stay informed, monitor risks and approach such investments cautiously.

Read Also: Private Vs Public Equity: Key Differences and Suitability

Conclusion

Equity shares play an important role in capital markets by helping companies raise funds and enabling investors to participate in the long-term potential growth of businesses. They offer ownership rights, voting opportunities and potential for long-term capital appreciation but also carry market-related risks that require careful evaluation.

FAQ

Are all shareholders subject to taxation on dividends?

Yes, dividends received from equity shares are taxable as per prevailing income tax laws. They are added to the investor’s total income and taxed accordingly.

How are equity shares different from bonds?

Equity shares represent ownership in a company, while bondholders are creditors. Equity shares may offer potential capital appreciation and possible dividends when declared, whereas bonds provide interest payouts and are generally less volatile relative to equities.

How is early-stage start-up capital utilised?

Start-ups may raise initial capital by issuing equity shares to founders, angel investors or venture capital firms. These funds are generally used for product development, market expansion, operational expenses, innovation and building initial business capabilities.