What Are Equity Shares? Everything You Need To Know

Equity shares give you a legal stake in a company’s profits, losses and decisions. If a business grows its earnings, strengthens its brand and manages its costs well, the value of your shares could often reflect that progress (though share prices are also influenced by other market factors beyond company performance). On the other hand, poor execution, excessive debt or governance issues may also quickly show up in the share price. Understanding what equity shares are, how they are structured and where they fit into your own financial plan may help you invest in an informed manner.

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 are units of ownership in a company. When you buy them, you become a shareholder, which means you own a proportionate slice of the company’s assets and profits. If a company has 1 crore equity shares outstanding and you hold 10,000 of them, you own 0.1% of that company.

Equity shareholders are also called “residual owners” because they are the last in line to be paid if the company is liquidated. Lenders, employees and preference shareholders get priority, and whatever remains belongs to equity shareholders. In return for taking this higher potential risk, you get a potential upside if the company grows. Your potential returns come from capital gains if the share price rises and through dividends whenever the board decides to distribute part of the realised profits.

Read Also: Equity Shares 101: Meaning, Types & Key Features

Characteristics of equity shares

Equity shares come with a distinct set of features that affect both the potential risks you take, as well as your rights, as an investor.

• You enjoy ownership and voting rights. You vote on key matters such as appointment of directors, major acquisitions or mergers and changes to the company’s capital structure. For a small retail investor, this usually happens through e-voting and postal ballots rather than physically attending meetings.
• Your liability is limited to the amount you invest, even if the company runs into losses. Creditors cannot target personal assets to recover company dues.
• Dividends are not guaranteed. The board decides whether to pay dividends depending on profits, cash flow and future expansion plans. A high-growth company might prefer to reinvest surplus cash instead of paying out dividends, while a mature company might share a higher portion of profits with shareholders.
• Share prices are market-driven and volatile. News about earnings, interest rates, sector outlook or government policy moves prices on a daily basis. Over short periods, emotions and speculation might influence prices more than fundamentals. Over long periods, business performance tends to dominate but this is not assured, as broader market conditions can also have a material impact.
• Liquidity is usually high in actively traded equity shares, enabling quick entry and exit. However, less-traded stocks may have lower liquidity and wider price gaps. In actively traded companies, you could exit your position quickly without a large difference between buying and selling prices, which is critical if you follow a disciplined risk-management framework (though liquidity can vary with market conditions).

Different types of equity shares

While “equity share” might sound like a single category, companies issue multiple variants with slightly different rights.

The most common is the ordinary or common equity share. These shares carry normal voting rights and full participation in profits and losses. This is usually what you buy on the exchange.

Some companies issue equity shares with differential voting rights. Here, you may get fewer or more voting rights per share compared to ordinary equity, often in exchange for a different dividend entitlement. Promoters sometimes use this structure to raise capital while retaining control.

Bonus shares are issued free of cost to existing shareholders. Your number of shares increases, but your proportionate ownership stays the same because the share price adjusts accordingly. Bonus issues may be used to signal confidence and improve liquidity or for other reasons as part of a company’s capital allocation decisions.

Rights shares are offered to existing shareholders at a specified price, usually at a discount to the market price. You get the first “right” to subscribe in proportion to your holding, helping the company raise fresh equity while maintaining your ownership stake.

Sweat equity shares are issued to employees or directors at a discount or for non-cash consideration, typically to reward specialised skills or value addition. These instruments align key talent with shareholder interests by turning them into partial owners.

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

Categories of share capital

When you read a company’s balance sheet or offer document, you come across different labels for share capital. Understanding them may help you decode how much equity has actually been issued and paid for.

Authorised share capital is the maximum share capital that a company is legally allowed to issue as per its constitutional documents. Increasing this limit involves shareholder approval and regulatory filings.

Issued share capital refers to the portion of authorised capital that the company has actually offered to investors. All authorised capital need not be issued immediately.

Subscribed share capital is the part of issued capital that investors have agreed to buy. In a public issue, if the company offers 1 crore shares but investors apply for only 80 lakh, the subscribed capital is based on 80 lakh shares. *Example for illustrative purposes only.

Paid-up share capital is the amount actually received from shareholders. In modern practice, companies usually call the entire amount upfront, so issued, subscribed and paid-up capital may often be equal.

How short-term investments work through equity

You often hear that equity is a long-term asset, yet many investors may also use it for shorter-term strategies. Short-term investing in equity relies on price movement over weeks or months rather than multi-year potential compounding.

One approach is momentum trading, where you ride stocks that are already moving strongly in one direction. Another is event-driven strategies, where you position around quarterly results, regulatory changes or corporate actions such as buybacks and demergers. Swing trading involves capturing medium-term moves within a broader trend using chart patterns, moving averages and risk-reward rules.

In all these methods, the holding period is short, but the underlying instrument remains the same equity share. The key difference is mindset. The focus on liquidity, volatility and technical levels is more than on deep valuation work. It is advised to set strict stop-loss levels because short-term equity prices might react sharply to news and sentiment but be aware that stop-losses may not always execute at desired prices during high market volatility. Short-term equity trading carries significant risks and may not be suitable for all investors.

FAQs

Are all shareholders subject to taxation on dividends?

Dividends are taxable in your hands as per your income-tax slab, regardless of whether you hold a few shares or a large stake. The company deducts tax at source above specified thresholds and reports the payout in your annual tax statement. You must still disclose the income in your income tax return and pay any additional tax due.

How are equity shares different from bonds?

Equity shares give you ownership, voting rights and a residual claim on profits, but your potential returns depend on business performance and market sentiment. Bonds are loans you give to a company or government, so you receive fixed interest and principal repayment but no ownership or voting rights. Equity offers higher potential upside with higher potential risk, while bonds suit investors who prioritise regular income and relative stability of capital. However, bonds too are not risk-free because factors such as interest rate movements, credit risk and liquidity conditions can affect their value.

How is early-stage startup capital utilised?

When startups raise equity in early rounds, the money usually goes into building the product, hiring key talent, marketing to acquire customers and creating basic infrastructure such as technology and compliance systems.