What is equity? Explaining shares buying selling and categories of shares

Last updated on April 25, 2023

Equity comprises of the funds invested in the company by the shareholders along with the amount of profit that is retained by the company for the expansion and growth purposes.

Equity is one of the most attractive asset classes for investors who want to diversify their portfolio and are willing to take risk in order to earn profits there from.

Equity market is the market where shares or stocks of the company are traded either through an exchange or over-the-counter. Equity market allows the investors and traders to buy and sell the equity shares held by them in a company at a same platform.

Equity shares act as a main source of raising funds for the company. The equity shares issued by the company are not redeemable and hence act as a source of long term financing for the company. Equity shares are the normal shares that are issued by the company.

Equity shareholders become the part owners of the company and hence have the voting right. They share the profits earned by the company which is paid to them in form of dividend and can also claim the assets of a company in the event of winding up of the company.

Equity shares are traded in the market at a value which is also known as the face value, book value, par value, market or issue price, intrinsic value, and so on.

Features of Equity Shares

• Equity shareholders become the part owner of the company depending on the number of shares held by them.
• Equity shareholders are given the voting right to take part in the important matters concerning the company.
• The amount of capital raised by the company through equity shares is held permanently and is only paid back to the shareholders at the time of winding up of the company.
• Equity shareholders have the right to elect the management of the company.
• Equity shareholders are given the right to claim dividend on the surplus profit earned by the company. However, the rate of dividend to be paid to the shareholders is decided by the company’s management.
• Equity shares can be transferred from one person to another without any consideration and hence are transferable in nature.

Advantages of Equity Shares

The advantages of equity shares can be seen from the viewpoint of both the company and the shareholder. Here are the advantages offered by equity shares.

Advantages for the Company

• Equity shares act as a primary source of capital for the company.
• The company need not create a charge over the assets when equity shares are issued.
• It is not necessary for the company to pay the liability of the equity shareholders.
• The company is not liable to pay the dividend to equity shareholders.
• A large equity capital base helps in increasing a company’s credit worthiness among its creditors and investors.

Advantages for the shareholders

• Equity shares are liquid in nature which makes it easier for the shareholders to sell them in the market.
• The rate of dividend paid to the equity shareholders is higher compared to debentures and bond holders.
• They have the right to vote and control the company’s management.
• Equity shareholders are eligible to receive both the benefit of dividend and the benefit of price appreciation in the value of the investment made by them.

Categories of Equity Shares

Equity shares in the Indian market are of various different categories which are as follows:

1. Authorized share capital: Authorized share capital is the maximum amount of capital that the company can issue as per its constitutional documents. It is at the discretion of the company to keep a part of authorized capital as unissued. The company can however, increase the amount of authorized capital by seeking the permission of the concerned authorities and by paying a certain amount of fees. The shareholders’ approval is also required by the company to change its authorized capital.
2. Issued share capital: The portion of the authorized capital that is offered by the company to the investors is called as the issued share capital. It is equal to the nominal value of the shares held by the company’s shareholders.
3. Subscribed share capital: It is the part of the issued share capital for which the company has received investments from the investors.
4. Paid Up capital: A part of the subscribed share capital for which the investors pay is called the paid up share capital. It is the amount of money received by the company in exchange of shares issued. It is created when the shares are directly sold to the investors in the primary market through an initial public offering (IPO).
5. Right Shares: Right shares are the shares issued by the company to you after you have made an initial investment in the company. It is the right to buy the additional securities in the company and is given to the existing shareholders of the company.
6. Bonus Shares: Bonus shares are the shares that the company distributes to the existing shareholders. They are issued as fully paid shares free of charge. This issue of bonus shares by the company to the existing shareholders is known as bonus share issue.
7. Sweat Equity Shares: Sweat equity shares are the shares issued by the company to its directors or employees as a discount or as a consideration for work done by them. They are issued to the employees for sharing their know-how, or intellectual insights for the benefit of the company.

Disadvantages of Equity Shares

Though equity shares come with a set of features and advantages, there are also certain disadvantages which the equity shares carry with them.

• Receiving a dividend on equity shares is not a certainty. Dividend to equity shareholders is paid after making payments for taxes, interest, and other stakeholders.
• Since the equity shareholders of a company are scattered to different locations it becomes difficult for them to exercise their voting right.
• The value of equity shares fluctuate in the market making them a risky investment.
• If a company issues fresh equity shares then the value of existing equity shared held by the existing investors depreciates.

How does buying and selling of shares takes place in India?

For buying and selling of shares, the investors need to have two types of accounts: A Demat Account and a Trading Account.

Demat Account is the account that holds your shares and investments in dematerialized form. Every time you buy or sell shares the Demat account is credited and debited respectively just like your bank account.

Trading Account is the account that is required by the investors for trading the securities in the market through stock exchanges. It can be said that for buying and selling of shares the investors need to have a trading account.

In order to buy and sell shares the investors need to follow the below-mentioned steps:

1. Getting a PAN Card: PAN or Permanent Account Number is one of the primary requirements that need to be fulfilled for entering financial transactions in India. In order start trading in securities and to buy and sell securities in a stock market having a PAN card is a must.
2. Choosing a Broker: Investors cannot go the exchanges directly to buy and sell shares. For buying and selling of shares authorized people are required who are known as brokers. A broker can either be an individual or an organization or even an online agent. A broker must be registered and licensed by SEBI to carry out trades.
3. Having a Demat and a Trading Account: As mentioned earlier, in order to buy and sell securities one needs to have a Demat and a trading account. Demat account will hold the investors’ shares in an electronic form in his name and will reflect his/her stock portfolio. However, a trading account is needed for buying and selling of shares. Trading account is like an intermediary that facilitates buying and selling of shares.
4. Depository Participants: There are two depository participants in India NSDL and CDSL. They provide an account to the shareholders which holds their shares and securities. Depository participants unlike the Demat and Trading account will hold the shares you bought and release the shares sold by you.
5. Get a UIN Number: If you want to invest for Rs.1,00,000 or more than the UIN or Unique Identification Number is required. It is not required in case of regular investors.
6. Buying and Selling of shares: In order to buy and sell the shares the investors need to inform their broker. They need to share the quantity and the price at which they wish to buy the shares. When the share reaches the price told by the investors they trade will be executed by the broker on behalf of the investor. The buy and the sell order remains valid for a certain period of time after which it is cancelled and a fresh order needs to be placed by the investor.